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C^eoUore  (0ilman 

i6mo, 

A  GRADED  BANKING  SYSTEM. 

$i.oo,  7iet. 

FEDERAL  CLEARING  HOUSES. 

i6mo, 

$i.oo,  net. 

HOUGHTON,  MIFFLIN  &  CO. 

Boston  and  New  York 

FEDERAL 
CLEARING  HOUSES 


BY 

THEODORE  OILMAN 

AUTHOR  OF    "  A   GRADED   BANKING  SYSTEM  ' 


BOSTON  AND  NEW  YORK 
HOUGHTON,  MIFFLIN  AND  COMPANY 

1899 


"In  times  of  crises,  reserves  are  essential,  and  it  is  of  supreme 
importance  that  all  the  great  hanks  of  the  country,  at  the  moment 
a  crisis  comes,  should  be  able  to  afford  relief  to  their  customers 
rather  than  feel  at  that  moment  bound  to  curtail  the  facilities  they 
are  giving.  It  is  all  very  well  for  banks  to  give  facilities  to  their 
customers  in  good  times,  but  a  customer  looks  to  the  bank  for 
facilities  when  the  pinch  comes  ;  and  if  when  the  pinch  comes,  the 
bank  itself  is  obliged  to  draw  in  its  resources,  to  call  in  money,  it 
disturbs  the  whole  of  the  mercantile  arrangements,  and  the  bank 
is  not  really  assisting  the  country,  but  is  thwarting  the  best  inter- 
ests of  the  banking  and  trading  communities . "  "My  object  would 
be  to  establish  a  second  reserve."  —Bight  Hon.  G.  J.  Goschen, 
M.  P.,  Chancellor  of  the  Exchequer,  in  his  speech  at  Leeds,  Eng., 
January  28,  1891.     (See  page  124.)  SP R  EG  K E LS 

"  In  the  modern  system  of  credit  it  is  indispensably  necessary  that 
there  should  be  some  source  to  create  and  issue  solid  credit  to  sus- 
tain solvent  houses  in  a  monetary  panic."  —Henry  Dunning  Mac- 
leod  in  "  The  Theory  of  Credit,''  page  848. 

"If  we  could  have  had  a  hundred  millions  of  such  currency  in 
1893,  it  would  have  saved  half  or  two  thirds  the  ill  effects  of  the 
panic."  —  Charles  Parsons  of  Saint  Louis,  Mo.,  in  his  letter  to  Hon. 
J.  H.  Walker,  April  9th,  1898.    (See  page  47.) 

"  That  which  you  must  say  to  the  Governor  and  Regents  of  the 
Bank  of  France  is  that  they  should  write,  in  letters  of  gold  on  the 
walls  of  their  assembly  room,  these  words  :  What  is  the  end  of  the 
Bank  of  France  ?  To  discount  the  obligations  of  all  the  commer- 
cial houses  of  France  at  4  per  cent.'" —  Napoleon  I.  to  Count 
Mollien,  15th  May,  1810. 

"  The  objects  (of  the  Constitution  of  the  United  States)  were 
commerce,  credit,  and  mutual  confidence  in  matters  of  property  ; 
and  these  required,  among  other  things,  a  uniform  standard  of 
value  and  medium  of  payments.  One  of  the  first  powers  given  to 
Congress,  therefore,  is  that  of  coining  money  and  fixing  the  value 
of  foreign  coins  ;  and  one  of  the  first  restraints  imposed  on  the 
States  is  the  total  prohibition  to  coin  money."  "  The  whole  con- 
trol, therefore,  over  the  standard  of  value  and  medium  of  pay- 
ments is  vested  in  the  general  government."  —  Daniel  Webster, 
1827. 


COPYRIGHT,  1899,  BY  HOUGHTON,  MIFFLIN   AND    COMPANY 
ALL  RIGHTS    RESERVED 


CONTENTS 


PAGE 

Preface iii 

I. 
The  Banking  Problem 1 

II. 
Note  on  the  Proposed  Bill 18 

III. 
Hearing    before    the   Committee   on   Banking   and    r 
Currency,  House   of    Representatives,    April   13, 

16,  1898 22 

Text  of  the  Proposed  Bill 22 

Explanatory  Statement  before  the  Committee ; 
Comparison  of  Restrictive  and  Expansive  Sys- 
tems OF  Banking 46 

Discussion  with  Committee  on  the  Proposed  Bill    77 
The  Remarkable  Accounts  of  the  Bank  of  France  115 
The  Leeds  Proposals  of  Mr.  Goschen,  Chancellor 
OF  THE  Exchequer 124 

IV. 

Fallacies  in  "Banking  upon  Business  Assets"      .    .  149 

V. 

A  Century  of  Panics.    An  Historical  Discussion  of 
the  Credit  System 163 

VI. 

A  Financial  Object  Lesson  from  the  War  with  Spain  189 
Part  I.  The  Forecast.  March  19,  1898  ....  189 
Part  II.    The  Retrospect.    August,  1898    .     .    .    .195 


103670 


iv  CONTENTS 

VII. 
Vakiance  of  Interest  between  the  Banks  and  the 
Public 203 

VIII. 
Relief  for  the  Banks 207 

IX. 

What  is  an  Elastic  Currency  ? 212 

X. 

ClearinoHouse  Currency  explained  and  defended    218 

XI. 

Contrast  between  American  and  European  Systems 
OF  Banking 231 

XII. 
Bank  Note  Issue  a  Public  Duty,  not  a  Business  for 
Profit  ;  with  Comments 242 

XIII. 
"Bank  Usurpation" 248 

XIV. 
The  Gold  Standard 254 

XV. 

Centralization;  Branch  Banking 258 

XVI. 

The  Clearing  House  ;  how  it  may  be  utilized  .    .    .262 

XVII. 
Liquidation,  Commercial  and  Bank 268 

XVIII. 

The    Inelasticity    of    our    Currency  ;    Conflicting 
Laws  of  Cash  and  Credit 275 

Index 283 


PREFACE 

The  object  of  this  book  is  to  present  the  rea- 
sons why  the  clearing  houses  of  our  country  should 
be  incorporated  under  a  federal  law. 

A  National  Clearing  House  is  the  proper  name 
for  one  organized  under  an  act  of  Congress.  The 
word  "  federal "  is  introductory,  and  has  reference 
to  the  mode  of  formation  rather  than  to  the  com- 
pleted organization. 

A  clearing  house  is  primarily  a  trustee  for  its 
bank  members,  into  whose  hands  debtor  banks  pay 
their  dues,  and  from  whose  hands  creditor  banks 
receive  the  amounts  to  which  they  are  entitled. 
The  clearing  house  has  no  power  to  use  the  money 
which  thus  comes  into  its  hands  for  any  other  pur- 
pose than  to  divide  it  among  and  deliver  it  over  to 
the  creditor  banks.  Any  other  use  of  the  money 
would  be  a  breach  of  trust.  Therefore  the  service 
rendered  by  a  clearing  house  is  that  of  a  trustee. 
As  banks  come  together  daily  at  the  clearing  house 
to  make  their  clearings,  they  find  it  convenient  to 
use  the  slight  organization  of  the  clearing  house 
for  other  purposes  connected  with  banking  inter- 


vi  PREFACE 

ests.  The  clearing  house  adopts  rules  regulating 
collection  charges  and  inspections.  If  it  becomes 
necessary  to  issue  clearing-house  certificates  it  acts 
as  trustee  to  hold  the  security  therefor,  and 
through  its  loan  committee  it  passes  on  the  suffi- 
ciency of  the  collateral  offered. 

All  the  services  rendered  by  clearing  houses  are 
of  a  fiduciary  character.  They  are  vital  to  the 
welfare  of  banks  and  important  to  the  entire 
nation.  The  functions  and  mode  of  organization  of 
clearing  houses,  however,  are  in  a  rudimentary  and 
sometimes  inchoate  state.  They  should  be  both 
developed  and  made  uniform.  This  can  be  accom- 
plished only  by  an  act  of  Congress  providing  for 
their  incorporation  under  a  general  law  which 
would  apply  equally  to  all,  and  whose  benefit 
would  be  open  to  all. 

By  this  step,  the  operations  of  clearing  houses 
would  be  brought  under  government  supervision, 
and  arbitrary  action  would  be  avoided.  Above  all 
a  trustee  would  be  created  with  whom  the  govern- 
ment could  deal,  enlarging  or  abridging  its  powers 
as  might  seem  fit,  and  imposing  duties,  responsi- 
bilities and  privileges  on  it  which  could  not  be 
safely  conferred  on  popular,  individual,  and  multi- 
pie  banks. 

The   discussion  contained   in   this  book  is  in- 


PREFACE  vii 

tended  to  show  the  advantages  which  would  result 
both  to  banks  and  the  business  community  from 
thus  bringing  clearing  houses  into  our  banking 
system  and  placing  them  under  government  super- 
vision. 

The  reasons  are  based  on  the  fundamental  prin- 
ciples of  the  credit  system,  on  business  experience, 
on  the  evidence  of  history,  and  on  the  political 
requirements  of  our  system  of  government. 

The  argiunent  is  intended  to  prove  primarily 
that  the  credit  system  requires  an  adjunct  which 
shall  provide  a  currency  for  its  support  based  ujDon 
a  credit  disconnected  from  and  independent  of  the 
banks.  If  there  were  no  such  need  of  assistance, 
the  discussion  woidd  be  useless.  If  the  assistance 
required  by  the  credit  system  need  not  be  inde- 
pendent of  the  banks,  then  the  incorporation  of 
clearing  houses  to  render  that  service  would  not 
be  required.  These  two  points,  the  occasional 
need  of  assistance,  and  that  such  aid  shaU  be  of  a 
higher  grade  of  credit  than  that  of  the  individual, 
local  banks,  are  two  of  the  starting  points  in  this 
discussion,  or  rather  two  points  to  which  we  must 
continually  recur. 

Under  the  credit  system  commerce  is  transacted 
in  the  money  declared  to  be  legal  tender  by  the 
government.     That  money  is  either  metallic  or  the 


viu  PREFACE 

paper  notes  of  the  government.  No  otlier  money- 
can  properly  be  made  a  legal  tender.  Tlie  Con- 
stitution so  declares  it.  The  credit  system  allows 
the  transaction  of  credit  operations  which  are 
maintained  at  par  by  the  legal  tender  money  of 
the  country.  From  four  to  six  times  as  much 
business  can  thus  be  done  as  could  be  if  there  were 
no  credit  system.  The  idle  capital  in  the  form  of 
cash  is  thus  one  quarter  or  one  sixth  of  the  amount 
it  would  be  if  legal  tender  were  used  in  all  money 
transactions. 

The  credit  system  is  liable  to  derangement  or 
interruption  or  collapse  from  various  causes,  such 
as  wars,  crop  failures,  over-trading,  failures  in  busi- 
ness, or  any  events  wliich  shake  the  confidence  of 
people  in  that  which  they  had  hitherto  considered 
substantial,  unassailable,  and  secure.  Confidence 
must  then  be  reassured  and  the  commotion  calmed 
before  the  credit  system  will  resume  its  former 
regular  mode  of  operation.  Cash,  or  legal  tender 
money,  is  the  best  assurance  which  the  credit  sys- 
tem can  have,  but  when  financial  alarm  is  aroused, 
it  is  found  that  there  is  only  one  quarter  or  one 
sixth  or  one  eighth  or  one  sixteenth  of  the  cash  on 
hand  needed  to  meet  all  demands.  The  rest  has 
vanished. 

There  are  two  ways  out  of   the  dilemma  thus 


PREFACE  IX 

presented.  One  is  obtaining  money  by  forced 
liquidation,  which  produces  distress  and  panic,  and 
the  other  is  providing  the  needed  cash  by  means 
of  some  adjunct  which  is  independent  of  the  credit 
system  and  disconnected  from  the  banks.  This 
must  rest  upon  such  a  solid  basis  that  no  question 
can  be  raised  as  to  its  goodness.  The  necessity 
for  this  assistance  is  proved  by  the  frequent  recur- 
rence of  monetary  disturbances,  by  the  beneficent 
effect  of  increased  accommodations  at  such  times, 
by  the  structure  and  laws  of  the  credit  system,  and 
by  the  history  of  monetary  panics. 

This  book  is  also  intended  to  show  how  clearing: 
houses  are  fitted  to  become  the  adjunct  above 
described. 

A  former  book  on  this  subject  by  the  present 
writer  was  entitled  "  A  Graded  Banking  System." 
"  Federal  Clearmg  Houses,"  is,  however,  a  title 
which  has  the  advantage  of  being  more  specific. 
The  two  books  together  unfold  the  subject  of  cur- 
rency and  banking  reform  sufficiently  to  enable 
the  reader  to  form  an  opinion  of  the  merits  of  the 
proposition  they  contain,  and  to  indicate  to  him 
points  on  which  further  investigation  can  be 
made. 

Some  of  the  following  chapters  have  appeared 
in  the  "  Bankers'  Monthly,"  "  Sound  Money,"  the 


X  PREFACE 

New  York  "  Tribune,"  '^  Evening  Post,"  "  Commer- 
cial Advertiser,"  "  World,"  "  Sun,"  "  Financier," 
and  other  daily  papers.  Their  original  form  has 
been  but  little  altered,  as  the  intention  is  to  give 
the  reader  the  line  of  argument  as  it  has  presented 

itself  to  the  writer. 

T.  G. 

New  Yokk,  December,  1899. 


FEDERAL  CLEARING  HOUSES 


THE    BANKING    PROBLEM 


The  American  people  have  set  before  them- 
selves the  most  difficult  problem  possible  in  gov- 
ernment. It  is  based  on  the  dictum  that  aU  men 
are  born  free  and  equal.  It  proceeds  on  the  prin- 
ciple that  all  government  should  be  by  consent  of 
the  governed.  It  requires  first  an  adhesion  to  a 
written  constitution  which  gives  a  guarantee  of 
a  republican  form  of  government,  and  permits  all 
questions  to  be  decided  by  a  majority  vote.  A 
self-government  of  this  kind  requires,  not  a  pro- 
perty qualification,  but  a  qualification  of  intelligence 
and  education.  To  educate  a  great  nation,  with 
the  distinct  purpose  that  it  shall  be  a  people  able 
to  understand  the  principles  of  government  and 
to  apply  them  wisely  and  intelligently  by  a  ma- 
jority vote,  is  the  crowning  glory  of  our  times 
and  of  the  American  people. 

To  deny  castes,  special  privileges,  and  monopo- 
lies is  a  necessary  residt  of  republican  principles. 
To  create  courts  where  the  humblest  citizen  shall 


2  FEDERAL   CLEARING  HOUSES 

be  on  a  par  with  the  highest,  and  to  enact  general 
laws  of  which  all  may  have  the  benefit,  under 
which  all  may  be  equally  protected,  is  the  develop- 
ment of  the  principle  laid  down  at  the  beginning 
of  the  history  of  our  government. 

There  has  been  no  more  difficult  subject  for  our 
government  to  deal  with  than  that  of  banking; 
and  now,  over  a  hundred  years  after  the  forma^ 
tion  of  our  nation,  the  question  of  the  hour  may 
fairly  be  stated  thus  :  Can  a  system  of  banking  be 
formed  in  accordance  with  republican  principles 
which  will  be  strong  and  sound  enough  to  with- 
stand all  the  shocks  of  panic,  and  as  strong  and 
sound  as  any  of  the  systems  formed  in  other 
countries  by  the  grant  of  special  privileges  and 
monopolies  ? 

One  hundred  and  twenty  years  after  our  Decla- 
ration of  Independence,  republican  principles  are 
put  to  a  new  test.  Our  government  has  with- 
stood the  shock  of  foreign  and  domestic  wars,  has 
passed  through  trials  which  have  threatened  its 
existence,  has  established  its  courts  of  justice 
which  command  the  respect  of  the  world,  has 
maintained  peace  at  home  and  conmianded  it 
abroad,  has  met  question  after  question  which  per- 
plexed and  distressed  us,  and  has  solved  all  of 
them  in  its  own  way  in  harmony  with  its  institu- 
tions. 

And  now  the  banking  system  presents  itself  as 
a  problem  unsolved  in  all  these  one  hundred  and 
twenty  years,  and  we  are  told  that  at  last  wc  have 


THE  BANKING  PROBLEM  3 

reached  a  question  which  cannot  be  settled  by  the 
application  of  our  national  principles ;  but  the 
solution  is  easy  and  ready  if  we  will  but  recognize 
this  failure,  and,  abaadoning  the  principles  which 
have  thus  far  guided  us,  will  give  up  our  efforts 
and  adopt  the  short  and  easy  road  of  a  special 
charter  and  a  banking  monopoly. 

It  must  be  acknowledged  that  all  do  not  allow 
the  necessity  for  any  change  in,  or  addition  to,  our 
banking  system.  Notwithstanding  we  have  had 
three  panics  in  four  years,  —  in  1893,  1895,  and 
1896,  —  and  many  others  in  previous  years,  there 
are  some  who  think  our  present  means  and  appli- 
ances are  sufficient,  and  that  we  can  go  on  in  the 
future  as  in  the  past.  This,  however,  is  not  the 
general  view ;  and  there  is  a  widespread  demand 
for  some  change  in  our  banking  system  which  will 
give  us  financial  stability  and  quiet,  and  prevent 
our  constantly  recurring  panics. 

Students  of  political  economy  who  return  from 
the  universities  of  Europe  tell  us  that  the  pro- 
fessors there  teach  their  classes  that  financial 
stability  cannot  be  attained  under  our  banking 
system.  Charles  Gide,  professor  of  political  eco- 
nomy in  the  university  of  Montpellier,  France, 
may  be  taken  as  an  exponent  of  this  view.  In  his 
work  on  Political  Economy,  he  discusses  the  ques- 
tion of  monopoly  or  liberty  in  banking  (p.  309). 
He  asks.  Ought  the  legislator  to  reserve  for  one 
bank  alone  the  right  of  issuing  notes,  or  should 
the  right  be  thrown  open  to  aU  who  care  to  use  it  ? 


4  FEDERAL   CLEARING  HOUSES 

This  is  the  question  of  monopoly  versus  competi- 
tion. He  then  takes  the  Bank  of  France  as  an 
example  of  monopoly,  and  the  United  States 
national  banking  system  as  an  example  of  competi- 
tion, and  asks.  Which  are  we  to  prefer  of  these  two 
systems,  —  which  offers  most  guarantees  to  the 
public,  and  which  gives  most  stability  to  finances? 

"  It  is  on  this  point,"  he  says,  "  that  we  find  an 
argument  for  monopoly.  A  bank  holding  an  emi- 
nent position  in  a  country,  and  rendered  strong  by 
its  history  and  its  traditions,  will  carry  into  the 
matter  of  issuing  its  notes  all  the  prudence  that 
is  desirable,  and  this  of  itself  is  the  only  effica- 
cious guarantee.  The  Bank  of  France  note  has 
proved  its  mettle,  and  in  ninety  years  has  never 
fallen  below  par.  The  Bank  of  France  has  al- 
lowed only  one  reproach  to  be  brought  against 
it,  —  that  of  excessive  caution.  To  sum  up,"  he 
continues,  "  we  must  choose  between  these  two 
systems,  —  either  monopoly,  with  the  most  perfect 
freedom  as  regards  the  issue  of  notes  ;  or  compe- 
tition, with  severe  regulations  as  to  issues.  In 
either  case  we  must  sacrifice  some  freedom,  and  in 
our  [his]  opinion  there  is  less  to  suffer  from  the 
first  system  than  there  is  from  the  second." 

This  is  a  fair  statement  of  the  views  of  those 
who  favor  a  governmental  bank.  Another  exam- 
ple of  monopoly  in  banking  is  afforded  by  the 
Imperial  Bank  of  Germany,  the  operations  of 
which  are  well  described  in  "  The  Theory  and 
History  of   Banking,"    by    Professor    Charles   F. 


THE  BANKING  PROBLEM  5 

Dunbar,  of  Harvard  College.  Since  its  establish- 
ment twenty-five  years  ago,  Germany  has  not  been 
visited  by  a  monentary  disturbance  which  the 
Imperial  Bank  has  not  been  able  to  control. 

It  must  be  acknowledged,  then,  that  a  bankmg 
monopoly  will  accomplish  its  object,  and  can  be  so 
ordered  that  financial  stability  and  quiet  wiU  be 
maintained  thereby. 

In  the  United  States  we  have  abandoned  the 
idea  of  special  charters  for  banks.  Banking  with 
us  is  free  to  all,  under  a  general  law  which  creates 
separate,  independent,  and  competitive  banks. 
This  result  was  reached  in  compliance  with  a  pop- 
ular demand,  with  the  defuiite  purpose  of  bringing 
banking  in  this  country  into  accord  with  the 
Declaration  of  Independence.  When  the  first 
general  law  was  passed  by  New  York  in  April, 
1838,  it  was  hailed  in  Congress  as  "  a  new  declara- 
tion of  independence."  So  it  was.  We  have, 
then,  here  a  test  of  republican  institutions.  Can 
we  have  fmancial  stability,  and  immunity  from 
panics,  under  a  banking  system  which  is  founded 
on  republican  principles?  If  not,  then  let  us 
make  haste,  and  with  confusion  of  face  adopt 
monopoly  in  banking,  and  acknowledge  that  re- 
publicanism will  do  weU  in  other  ways,  but, 
when  it  comes  to  banking,  its  principles  must  be 
abandoned. 

But  there  is  no  need  of  making  this  acknow- 
ledgment :  our  republican  banking  system  can  be 
made  as  preeminent  as  is  our  judicial  system.     It 


6  FEDERAL   CLEARING  HOUSES 

needs  but  to  be  completed.  The  same  method  by 
wliich  we  organize  individual  citizens  into  commu- 
nities and  states,  and  yet  preserve  their  equality 
and  independence,  can  be  applied  to  organize  in- 
dividual banks  into  groups,  clearing  houses,  and 
clearing-house  districts.  Our  individual  banks 
are  the  units  in  our  financial  system.  If  units  are 
not  combined  into  gi'oups  with  mutual  relations, 
there  is  no  system.  Says  Ulysses,  in  "  Troilus  and 
Cressida  :  "  — 

"  Take  but  degree  [gradatiou,  order,  ascent]  away,  untune  that 

string, 
And,  hark,  what  discord  follows  !  each  thing  meets 
In  mere  oppugnancy." 

The  simple  expedient  which  will  introduce  sys- 
tem into  our  banking  methods  is  to  give  United 
States  charters  to  our  clearing  houses.  When 
once  brought  under  governmental  control  as  fed- 
eral clearing  houses,  it  will  be  safe  to  grant  them 
such  additional  powers,  not  possessed  by  individual 
banks,  as  may  be  needed  to  constitute  them  sources 
for  the  issue  of  solid  credit  in  times  of  financial 
alarm  or  of  active  business.  This  would  make  a 
banking  system  wliich  can  be  compared  with  the 
successful  governmental  banks  of  Europe. 

The  four  large  banking  systems  of  the  world 
are  those  of  France,  Germany,  England,  and  the 
United  States.  For  years  there  has  been  hardly 
any  discussion  of  banking  methods  in  France  and 
Germany  with  the  purpose  of  introducing  radical 
changes  into  their  systems. 


THE  BANKING  PROBLEM  7 

In  England  and  the  United  States,  changes  m 
the  banking  systems  are  living  political  questions. 
The  agitation  in  this  country  enters  into  all  our 
election  campaigns,  and  the  currency  question  is 
at  times  the  only  dividing  line  which  separates 
parties. 

In  England,  beginning  immediately  after  the 
Baring  panic  of  1890,  the  most  prominent  and 
absorbing  question,  in  banking  and  business  cir- 
cles, has  been  the  defect  in  their  banking  system, 
which  leaves  the  country  the  prey  to  panic,  and 
gives  it,  as  the  only  protection,  some  form  of  suspen- 
sion of  the  bank  charter,  or  dependence  on  outside 
aid.  Tliat  loans  from  the  Bank  of  France  should 
be  the  main  rehance  of  the  Bank  of  England  is 
too  humiliating  for  British  pride  to  contemplate 
with  equanimity. 

The  proposals  made  at  the  Leeds  dinner,  Jan- 
uary 28,  1891,  by  Mr.  Goschen,  then  Chancellor 
of  the  Exchequer,  were  a  vain  attempt  to  devise 
some  means  which  would  be  a  satisfactory  substi- 
tute for  suspension  of  the  bank  charter  or  appeal 
to  outside  aid.  In  his  speech  ^  Mr.  Goschen  said 
that  he  was  "  engaged,  and  hopefully  engaged, 
with  the  assistance  of  the  authorities  of  the  Bank 
of  England,  in  devising  a  scheme  by  which  we 
may  strengthen  the  permanent  reserves  of  the 
country,  by  which  we  may  give  greater  help  in 
emergencies,  and  by  which  we  may  hope  that  some 
of  those  fearful  catastrophes  which  have  sometimes 
^  Mr.  Goschen' s  speech  is  given  on  page  124. 


8  FEDERAL   CLEARING  HOUSES 

threatened  the  commerce  of  this  country  [Eng- 
land] may  be  avoided.  I  am  engaged  on  plans 
of  that  kind,  and  I  trust  I  may  be  able  to  give 
effect  to  them."  The  remark  suggests  itself,  that 
previous  changes  in  the  banking  system  of  Eng- 
land were  made  by  the  government  alone ;  and  as 
the  Bank  of  England  is  a  private  corporation, 
and  a  party  interested  on  one  side  of  the  case, 
measures  satisfactory  to  the  public  could  hardly 
be  expected  as  the  result  of  Mr.  Goschen's  con- 
ferences. 

In  speaking  of  the  cash  reserves  of  the  country 
apart  from  the  question  of  gold,  he  said :  "  I  must 
give  utterance  to  a  strong  conviction  which  I  hold 
that  the  banking  reserves  of  the  country  are  in- 
adequate to  its  necessities,  and  are  too  small  as 
compared  with  the  gigantic  liabilities  which  our 
large  institutions  have  incurred."  Having  es- 
caped a  great  catastrophe  "  by  the  skin  of  their 
teeth,"  the  financial  public  of  England  must  con- 
sider methods  for  protecting  themselves  in  the 
future. 

Mr.  Goschen  depicted  as  follows  the  dangers 
of  a  bank-note  currency  issued  on  the  credit  of 
the  banks.  "  Paper,"  he  said,  "  expels  gold  un- 
less you  take  particular  precautions  to  retain  the 
gold,  and  for  my  part  I  am  totally  opposed  to  any 
measure  which  would  simply  end  in  the  expidsion 
of  gold  from  the  circulation  of  the  country.  I 
would  have  a  separate  stock  of  gold  realized  to 
this  country  by  a  certain  issue  of  paper  money, 


THE  BANKING  PROBLEM  9 

which  was  to  be  issued  only  when  emergencies 
should  arise."  He  proposed  that  this  second  re- 
serve should  take  the  place  of  a  suspension  of  the 
charter.  "An  internal  panic,"  he  said,  "  might 
be  saved  by  a  further  issue  of  notes,  not  as  at 
present  on  credit,  but  against  a  reserve  which  has 
accumulated  by  such  measures  as  I  have  endeav- 
ored to  describe." 

The  underlying  thought,  the  motive,  of  Mr. 
Goschen's  speech  is,  that  the  credit  system  re- 
quires an  adjunct  for  its  support,  which  should 
be  independent  of  and  disconnected  from  the 
banks,  and  which  cannot  be  used  by  the  banks 
as  a  common  resource  in  their  ordinary  every-day 
business. 

The  "  London  Times  "  explained  the  proposals 
as  follows :  "  The  government  would  forego  the 
profit  on  the  issue,  and  accumulate  the  gold  under 
special  and  stringent  conditions,  to  be  utiHzed 
in  case  of  a  crisis  such  as  would  justify  a  suspen- 
sion of  the  bank  charter.  As  we  utiderstand  Mr. 
Goschen,  this  would  constitute  the  supplemen- 
tary reserve  he  wishes  to  see  established.  All  de- 
pends upon  the  absolute  security  of  the  new  re- 
serve against  ordinary  demands  on  the  part  of 
the  holders  of  notes  coming  to  be  paid  in  sover- 
eigns." 

The  proposal  seems  to  have  some  of  the  charac- 
teristics of  the  French  system,  by  which  a  reserve 
of  gold  is  accumulated  by  the  issue  of  notes,  and 
thereafter  held  by  the  bank  subject  to  use  without 


10  FEDERAL   CLEARING  HOUSES 

regard  to  the  payment  of  the  notes  by  which  it 
was  obtained.  The  difficulties  would  be  gi^eat  in 
the  way  of  engi-afting  on  the  Bank  of  England 
this  method  of  providing  a  reserve. 

Mr.  Goschen  clearly  states  that  an  issue  of 
notes  to  sustain  the  credit  system  must  be  based 
on  something  else  besides  the  credit  of  the  banks. 
He  condemns  the  use  of  the  printing-press,  mean- 
ing thereby  issues  of  bank-notes  against  assets  in 
the  hands  of  the  banks.  He  does  not  object  to 
the  printing-press  if  the  notes  printed  are  secured 
by  gold.  Mr.  Goschen,  then,  does  not  object  to 
paper,  but  to  the  way  the  paper  is  secured.  If 
secured  by  a  special  pledge  of  gold,  he  approves 
it ;  if  it  is  issued  on  the  credit  of  banks,  he  disap- 
proves it.  As  the  gold  cannot  pro2)erly  be  used 
twice  as  security  for  a  fiduciary  issue,  the  security 
of  gold  values  in  the  form  of  banking  assets,  with 
safe  margin,  might  not  seem  an  unsuitable  sub- 
stitute for  the  gold  itself.  These  banking  assets 
are  accumulated  by  the  banks  in  the  regular  course 
of  business,  and  no  special  effort  is  required,  such 
as  is  proposed  by  Mr.  Goschen,  to  accumulate 
gold. 

His  suggestions  for  a  second  central  reserve,  or 
for  a  fiduciary  issue  of  currency,  have  not  been 
formulated  into  a  practical  measure,  which,  for 
months  after  Mr.  Goschen  made  the  proposal,  the 
public  attentively  waited  for. 

The  London  money  market  has  another  diffi- 
culty to  contend  with,  which  is  paralleled  in  New 


THE  BANKING  PROBLEM  11 

York.  The  growth  of  outside  banks  has  made 
the  influence  of  the  Bank  of  England  proportion- 
ately less  than  it  was  in  former  years.  These 
banks,  like  the  trust  companies  in  New  York, 
with  their  immense  deposit  obligations,  hold  real 
cash  reserves  which  amomit  to  but  a  small  per- 
centage of  their  liabilities,  and  their  chief  if  not 
sole  reliance  is,  in  the  one  case,  on  the  reserve  of 
the  Bank  of  England,  and,  in  the  other,  on  that 
of  the  banks  associated  in  the  New  York  Clearing 
House.  Mr.  Goschen  mentioned  one  bank  in 
London  with  forty-five  million  dollars  of  deposits, 
whose  cash  balance  was  about  six  per  cent.  As  far 
as  tlie  obligations  of  these  outside  banks  are  on  de- 
mand, —  and  they  are  mostly  so,  —  they  weaken 
and  dimmish  the  apparent  and  visible  reserve  in 
that  proportion. 

As  long  ago  as  1856,  the  then  Governor  of  the 
Bank  of  England,  T.  M.  Weguehn,  in  a  letter  to 
Sir  G.  C.  Lewis,  then  Chancellor  of  the  Exche- 
quer, commenting  on  the  small  reserve  carried  by 
London  banks  other  than  the  Bank  of  England, 
wrote  that  this  state  of  affairs  constituted  "  a 
new  and  hitherto  little  considered  danger  to  the 
credit  of  the  country."  To  impose  upon  these 
outside  banks  and  trust  companies,  in  New  York 
and  London,  the  duty  of  maintaining  a  cash  re- 
serve equal  to  that  of  the  Bank  of  England  and 
the  Associated  Banks  of  New  York,  would  be 
unpopular  in  New  York,  and  Mr.  Goschen  said  he 
would  not  undertake  to  propose  it  in  London. 


12  FEDERAL   CLEARING  HOUSES 

Since  1891,  the  discussion  as  to  tlie  reserves 
of  the  banks  of  London  has  seldom  flagged  in 
interest,  and  every  threatened  war  or  other  com- 
motion has  sfiven  it  new  life  and  interest.  And 
now,  seven  years  after  Mr.  Goschen  made  his 
Leeds  proposals,  and  forty-three  years  after  Mr. 
Weguelin  wrote  his  letter  to  Mr.  Lewis,  the  con- 
sideration of  the  best  means  of  maintaining  bank 
reserves  "  is  the  chief  theme  of  discussion  in  bank- 
ing circles "  in  England,  or,  as  another  English 
writer  has  said,  "  the  weakness  of  our  specie  re- 
serves is  the  most  important  point  at  the  present 
moment  "  (July,  1899).  Again,  the  Chancellor 
of  the  Exchequer,  Sir  Michael  Hicks  Beach,  at  a 
dinner  given  June  28,  1899,  by  the  mayor  of 
London,  takes  as  the  burden  of  his  speech  the 
necessity  of  reform  as  to  banldng  reserves.  He 
thought  that  "  it  was  felt  that  the  great  and  ever- 
increasing  fabric  of  credit  rested  at  present  upon 
a  very  narrow  cash  basis."  The  London  "  Bank- 
ers' Magazine  "  for  August,  1899,  says  that  a  com- 
mittee of  the  Central  Association  of  Bankers  is 
still  examining  the  question.  "  It  would  be  a 
thousand  pities,"  it  adds,  "if  this  well-directed 
effort  at  reform  were  to  prove  as  ineffective  as  the 
attempt  in  the  same  direction  made  when  Mr. 
Goschen  was  Chancellor  of  the  Exchequer."  This 
public  acknowledgment  on  the  part  of  two  Chan- 
cellors of  the  Exchequer,  and  of  the  Central  Asso- 
ciation of  British  Bankers,  and  of  prominent  finan- 
cial periodicals,  of  the  pressing  need  of  reform  in 


THE  BANKING  PROBLEM  13 

their  system  of  banking  reserves,  should  convince 
American  bankers  and  legislators  that  they  have 
little  to  learn  from  the  English  banking  system  as 
it  exists  at  present.  It  would  be  wiser  to  wait 
until  the  proposed  reforms  have  been  threshed 
out,  and  embodied  in  an  act  of  Parhament,  before 
taking  the  English  banking  system  as  a  model  for 
imitation. 

In  France  and  Germany  the  case  is  different. 
They  have  systems  which  work  in  the  main  satis- 
factorily, and  we  have,  therefore,  England  and  the 
United  States  on  one  side,  with  their  turmoil  of 
banking  discussions,  and  France  and  Germany  on 
the  other,  comparatively  free  therefrom,  as  repre- 
sentatives of  two  different  systems  of  banking. 
The  chief  point  of  distinction  between  the  two 
systems  is,  that  in  France  and  Germany  they  have 
credit  currencies  for  domestic  use,  while  in  Eng- 
land and  America  we  have  none,  but  rely  upon  our 
reserves  of  gold  and  legal  tenders  to  meet  occa- 
sional demands  for  currency. 

The  problem  is  so  simple  that  it  can  be  stated 
in  a  few  sentences.  The  tendency  with  banks  to 
employ  their  money  "  up  to  the  hilt,"  to  use  Mr. 
Goschen's  expression,  —  that  is,  up  to  the  legal  re- 
serve limit,  or  the  limit  of  the  "  apprehension  mini- 
mum "  —  is  inevitable.  The  desire  to  make  as  much 
money  as  possible  for  their  banks  is  universal  with 
directors.  Therefore,  when  there  is  a  demand  in 
England  and  America  for  currency  to  move  crops, 
for  the  holiday  seasons,  or  for  active  business  uses. 


14  FEDERAL   CLEARING  HOUSES 

our  banks  must  draw  on  their  reserves  of  gold  or 
legal  tender  to  meet  tlie  demand ;  while  in  France 
and  Germany  the  same  kind  of  a  demand  would  be 
met  by  bank-note  currency,  which  is  issued  on  the 
basis  of  business  assets  by  a  few  banks  of  special 
grades  above  the  popular  banks.  The  effect  of 
these  two  systems  on  business  is,  that  in  England 
and  America  the  drams  of  gold  come  at  frequent 
intervals,  and  every  time  a  drain  occurs  it  upsets 
business,  and  causes  unexpected  liquidations,  great 
inconvenience,  and  loss ;  while  in  France  and 
Germany  the  issues  of  bank  asset  currency  go 
out  and  come  in  automatically,  or  as  a  matter  of 
routine,  with  slight  influence  on  business,  and  in 
France  with  hardly  a  perceptible  change  in  the 
rates  for  money,  year  after  year.  To  avoid  this 
difficulty  in  our  country,  a  credit  currency  is  im- 
perative. 

The  issue  of  a  fiduciary  currency  based  on  the 
credit  of  the  banks  under  English  methods  of 
banking  is  attended  with  such  dangers  that  the  two 
chancellors  both  recoil  from  proposing  such  a 
measure.  But  the  "  up  to  the  hilt  "  tendency,  and 
the  monetary  disturbances  which  result  therefrom, 
must  be  accepted  as  inevitable.  Mr.  Goschen  and 
Mr.  Beach  both  seem  to  think  there  is  no  middle 
ground  between  a  fiduciary  issue  made  by  banks 
holding  in  their  own  custody  the  banking  assets 
on  wliich  it  is  based,  and  an  issue  of  notes  based 
pound  for  pound  on  gold.  The  latter  kind  of 
issue  has  none  of  the  elements  of  a  credit  currency, 


THE  BANKING  PROBLEM  15 

and  would  not  be  a  protection  to  credit,  except  by 
the  costly  method  of  carrying  a  stock  of  idle  capi- 
tal in  the  shape  of  unused  gold  to  meet  tempo- 
rary demands,  which  is  the  very  waste  and  loss 
the  credit  system  is  designed  to  avoid.  Mr.  Gos- 
chen  and  Mr,  Beach  fear  an  issue  which  would 
expel  gold,  and  yet,  if  they  would  consult  Eng- 
lish financial  history,  they  would  find  instances 
where  a  third  method  has  been  employed  with  un- 
varying success.  It  is  the  issue  of  a  credit  cur- 
rency based  on  banking  assets  held  by  a  trustee, 
like  the  Parliamentary  Commission  of  1793,  and 
pledged  for  the  redemption  of  the  currency.  Such 
currency  cannot  cause  a  suspension  of  specie  pay- 
ments, because  under  these  "particular  precau- 
tions "  it  is  based  on  gold  values,  and  must  be  re- 
deemed in  gold  or  cancelled  by  mutual  set-offs. 
The  pledge  of  collateral  puts  a  pressure  on  the 
banks  to  redeem  their  notes.  All  the  fears  of  the 
two  chancellors  of  a  loss  of  gold  are  groimdless 
when  such  a  currency  is  considered.  The  London 
Clearing  House  or  the  Bank  of  England  should  be 
the  trustee  to  hold  the  security  collateral  to  the 
currency  issued. 

English  banking  will  apparently  continue  in  its 
present  deadlock  until  their  bankers  and  legisla- 
lators  see  that  a  credit  system  cannot  be  conducted 
safely  without  some  source  or  sources  for  the  issue 
of  solid  credit  in  times  of  financial  alarm.  And 
they  must  further  recognize  that  these  sources 
must  be  independent  of  individual  popular  banks, 


16  FEDERAL   CLEARING  HOUSES 

and  therefore  the  credit  issued  must  be  secured  by 
ample  collaterals.  As  the  English  mind  slowly 
gives  up  accepted  ideas,  even  though  recognized  as 
defective,  we  must  expect  a  long  delay  in  the  com- 
ing of  any  reform  in  their  banking  system. 

As  we  turn  to  the  United  States,  a  more  pro- 
mising jDrospect  opens  up  before  us.  We  have  the 
foundation  of  a  logical  formation  of  individual 
banks,  incorporated  under  general  laws,  to  build 
upon.  Our  general  banking  law  provides  a  gov- 
ernment inspection,  and  a  prescribed  percentage  of 
lawful  money  reserve,  which  England  has  not,  and 
which  it  seems  impossible  to  attain  by  voluntary 
agreement.  We  have  started  right,  and  have  laid 
a  true  foundation  in  accordance  with  the  everlast- 
ing principles  of  the  equal  rights  of  man.  We 
have  had  a  good  experience  with  state  banking 
systems,  and  have  found  that  they  work  to  the 
entire  satisfaction  of  the  people  of  each  separate 
State.  We  have  a  system  of  clearing  houses  al- 
ready formed,  which  is  waiting  to  be  incorporated 
into  the  national  system.  Ail  the  material  is 
ready,  we  have  had  our  own  experience  to  guide 
us,  and  we  have  the  example  of  successful  gov- 
ernmental banks  in  France  and  Germany.  We 
can  see  the  parallel  between  a  governmental  bank 
and  a  clearing  house,  the  one  monarchic  the  other 
republican,  and  both  performing  the  same  func- 
tions and  occupying  the  same  relation  to  popu- 
lar banks.  We  have  passed  through  the  contest 
over  special  charters,  and  have  decided  in  favor  of 


THE  BANKING  PROBLEM  17 

general  laws ;  and  now  we  shall  make  no  future 
progress  or  take  another  step  in  banking  reform 
except  by  means  of  a  general  law,  the  benefits  of 
which  wiU  be  open  to  all  the  people  without  distinc- 
tion. We  have  for  our  guide  in  the  National  Bank 
Act  as  perfect  a  general  law  as  can  be  framed  by- 
Congress.  While  it  may  seem  to  some  that  the 
progress  of  this  country  to  a  solution  of  banking 
difficulties  has  been  slow,  when  we  consider  the 
wisdom  of  the  laws  which  have  been  enacted  and 
the  many  questions  we  have  settled  and  have  left 
behind  us,  and  which  even  England  has  before 
her,  we  can  then  see  that  this  country  is  many 
years  nearer  the  end  of  the  long  debate  over  finan- 
cial questions  than  are  many  peoples  who  con- 
sider themselves  in  advance  of  us. 

These  general  remarks  lead  us  to  the  discus- 
sion of  the  details  of  the  proposed  measure  and  of 
principles  and  facts  to  substantiate  the  positions 
claimed,  and  of  the  various  errors  which  are  con- 
stantly met,  and  which  it  is  necessary  to  answer 
and  remove. 


II 

NOTE    ON   THE   PROPOSED    BILL 

The  bane  of  financial  discussions  is  that  tliey 
are  apt  to  be  theoretical  and  not  practical.  It  was 
therefore  a  wise  rule  of  the  Committee  on  Banking 
and  Currency  of  the  54th  and  55th  Congresses 
that  no  suggestions  for  banking  reform  would  be 
heard  unless  they  were  accompanied  by  a  biU  in 
which  the  proposed  plan  was  presented  in  form 
ready  for  examination. 

To  meet  this  requirement  the  following  bill  was 
prepared,  and  to  secure  attention  and  discussion 
was  introduced  in  the  54th  Congress  by  Hon. 
E.  H.  Fairchild  and  in  the  55th  Congress  by  Hon. 
Richard  Bartholdt. 

It  was  prepared  after  a  study  of  the  banking 
laws  of  all  the  States  and  of  Congress.  It  is 
framed  chiefly  on  the  plan  of  the  National  Bank 
Act,  and  borrows  some  of  its  provisions  and 
phraseology  from  the  laws  of  New  York,  Iowa, 
Indiana,  and  other  States. 

The  National  Bank  Act  grew  out  of  the  laws  of 
the  different  States,  and  this  bill  is  a  development 
in  the  same  line.  The  objects  aimed  at  in  the 
bill  are  to  incorporate  clearing  houses  under  a 
federal  law ;  to  restrict  their  operations   so  that 


NOTE  ON  THE  PROPOSED  BILL  19 

they  shall  not  conflict  or  compete  with  popular 
banks  in  any  of  their  functions ;  to  give  the  bene- 
fit of  membership  to  all  commercial  banks  in  good 
standing  organized  under  state  or  national  laws  ;  to 
give  to  one  clearing  house  in  each  State  the  power 
to  issue  currency  to  its  members  at  seventy-five  per 
cent,  of  the  value  of  banking  assets  pledged ;  to 
require  all  members  of  clearing  houses  to  accept 
this  currency  for  all  dues  to  them;  to  make  the 
borrowing  bank  the  first  guarantor  of  the  notes 
advanced  to  it ;  to  make  the  banks  of  a  State  or 
district  the  second  guarantor,  and  as  such  liable 
for  any  loss  on  loans  made  by  the  clearing  house 
of  which  they  are  members  ;  and  any  further  loss 
to  be  assessed  pro  rata  on  all  other  clearing  houses 
organized  under  this  act,  as  the  third  guarantors. 

There  woidd  thus  be  forty-five  or  fifty  clearing 
houses  of  issue  throughout  the  United  States,  and 
the  benefits  therefrom  would  be  distributed  equally 
in  accordance  with  banking  capital  throughout  the 
Union.  This  would  avoid  centralization,  or  the 
congestion  of  funds  in  large  cities.  The  local 
issue  of  currency  is  thus  attained. 

The  liability  to  a  contingent  loss  would  make  loan 
committees  cautious,  the  danger  from  excessive 
issues  of  currency  would  be  reduced  to  a  minimum, 
and  there  would  be  a  constant  pressure  on  the  banks 
to  retire  this  currency  and  take  up  their  collateral. 
Yet  the  relief  to  be  obtained  by  issues  of  sound 
credit  would  always  be  available  in  case  of  need. 
These  issues  would  go  out  from  banks  in  place  of 


20  FEDERAL   CLEARING  HOUSES 

their  reserves,  which  would  be  retained  undimin- 
ished for  use  in  settlement  of  foreign  balances. 
Under  our  present  system  any  call  for  money  must 
be  met  by  drafts  on  reserves;  and  as  reserves 
diminish,  the  obligations  of  the  banks  must  be 
diminished  pari  passu.  This  is  the  cause  of 
spasms  in  the  money  market,  or  panics.  By  pro- 
viding the  banks  another  way  of  meeting  sudden 
demands  for  currency,  borrowers  will  be  protected, 
and  a  great  benefit  conferred  on  all  the  people. 

The  essential  feature  of  bank  note  issues  under 
a  general  law  is  the  deposit  of  approved  collateral 
security  in  the  hands  of  a  trustee  of  acknowledged 
standing.  By  this  bill,  the  clearing  houses  of 
issue  are  made  such  trustees.  Their  number  being 
comparatively  small,  about  fifty  for  75,000,000 
people,  and  each  being  representative  of  the  banks 
in  its  district,  they  would  become  prominent  and 
responsible  bodies,  whose  acts  could  be  reviewed 
by  Congress,  and  whose  responsibilities  and  func- 
tions would  increase  or  diminish  without  disturb- 
ing legislation  regarding  the  popular  banks.  The 
latent  power  of  assistance  possessed  by  clearing 
houses  of  issue  would  place  our  banks  in  an  im- 
pregnable position,  and  panics  like  those  of  1873 
and  1893  could  hardly  recur  if  tliis  system  were 
in  operation. 

The  essential  feature  of  a  general  law  is  that 
all  the  people  can  have  the  benefits  of  its  provi- 
sions. The  National  Bank  Act  is  open  to  all  who 
desire  to  engage  in  banking.     An  act  incorporat- 


NOTE  ON  THE  PROPOSED  BILL  21 

ing  clearing  houses  should  also  be  open  to  all 
banks  duly  certified  by  state  or  national  author- 
ity. It  would  then  be  an  act,  not  only  for  the 
protection  of  commerce  and  trade,  but  for  the  pe- 
cuniary benefit  of  any  who  wish  to  avail  of  its 
provisions.  All  foundation  for  the  prejudice 
against  banks  would  thereby  be  entirely  removed. 


Ill 


HEAEING    BEFORE    THE     COMMITTEE    ON    BANKING 

AND  CURRENCY,  HOUSE  OF  REPRESENTATIVES 

BILL    INCORPORATING    CLEARING   HOUSES 

The  committee  met  at  10.30  A.  M.,  Hon.  Joseph 

H.  Walker  in  the  chair. 

Present :  Messrs.  Walker,  Johnson,  Van  Yoor- 

his,  McCleary,  Fowler,  Spalding,  Hill,  Southwick, 

Prince,  Mitchell,  Capron,  Cox,  and  Ermentrout. 
Theodore  Gilman,  a  banker  of  New  York  City, 

appeared  before   the   committee  in  advocacy  and 

explanation  of  the  bill  H.  R.  9279. 

[Bill  H.  R.  9279,  Fifty-fifth  Congress,  second  session.] 

In  the  House  of  Representatives,  March  17,  1898. 
Mr.  Bartholdt  (by  request)  introduced  the  fol- 
lowing bill ;  wliich  was  referred  to  the  Commit- 
tee on  Banking  and  Currency  and  ordered  to  be 
printed. 

A  BILL  to  protect  and  support  commercial  credit,  to 
equalize  rates  of  interest,  to  provide  for  the  incorpo- 
ration of  clearing  houses,  to  regulate  and  define  their 
operations,  to  provide  a  clearing-house  currency,  se- 
cured by  pledge  of  commercial  assets  and  the  respon- 
sibility of  the  associated  banks,  and  to  provide  for  the 
circulation  and  redemption  thereof. 

Be   it  enacted    hy   the   Senate  and  House  of 


HEARING  BEFORE   THE  COMMITTEE     23 

Representatives  of  the  United  States  of  America 
in  Congress  assembled,  That  associations,  Articles  of 
to  be  known  as  clearing  houses,  for  the  tion. 
settlement  of  money  transactions  by  effecting 
clearances  between  banks,  and  for  doing  other 
business  for  and  between  banks  not  inconsistent 
with  the  provisions  of  this  act,  may  be  formed  by 
any  number  of  banks  not  less  than  five,  duly  incor- 
porated, either  under  the  National  Currency  Act  or 
under  the  laws  of  any  State  or  Territory,  of  which 
a  majority  shall  be  organized  under  the  National 
Currency  Act,  in  any  city  of  not  less  than  six  thou- 
sand inhabitants,  who  shall  enter  into  articles  of 
association  for  the  regidation  of  the  business  of  the 
association  and  the  conduct  of  its  affairs,  wliich 
said  articles  shall  be  approved  by  the  stockliolders 
of  each  bank  uniting  to  form  the  association  at  a 
meeting  called  for  the  purpose  and  shall  be  signed 
by  the  officers  of  each  bank  by  authority  conferred 
upon  them  to  do  so  by  vote  of  the  stockholders, 
and  a  copy  of  them  forwarded  to  the  comptroller 
of  the  currency,  to  be  filed  and  preserved  in  his 
office. 

Sec.  2.  That  the  banks  uniting  to  form  such  an 
association  shall,  by  their  proper  officers,  make 
an  oro'anization    certificate,  which    shall  ^      .   .. 

c?  '  Organization 

specify  certificate. 

First.  The  name  assumed  by  such  association, 
which  name  shall  be  "  The  Clearing  House  of 
(giving  the  name  of  the  city  where  located  and 
where  its  business  of  effecting  clearances  shall  be 
carried  on)." 


24  FEDERAL   CLEARING  HOUSES 

Second.  The  names,  the  amounts  of  the  capital 
stock,  and  the  number  of  shares  into  which  it  is 
divided,  of  the  hanks  composing  the  association. 

Third.  A  declaration  that  said  certificate  is 
made  to  enable  such  banks  to  avail  themselves  of 
the  advantage  of  tliis  act. 

The  said  certificate  shall  be  acknowledged  be- 
fore a  judge  of  some  court  of  record  or  a  notary 
public,  and  such  certificate,  with  the  acknowledg- 
ment thereof  authenticated  by  the  seal  of  such 
court,  shall  be  transmitted  to  the  comptroller  of 
the  currency,  who  shall  record  and  carefully  pre- 
serve the  same  in  his  office.  Copies  of  such  cer- 
tificate, didy  certified  by  the  comptroller  and 
authenticated  by  his  seal  of  office,  shall  be  legal 
and  sufficient  evidence  in  all  courts  and  places 
within  the  United  States  or  the  jurisdiction  of  the 
Government  thereof  of  the  existence  of  such  asso- 
ciation and  of  every  other  matter  or  thing  which 
could  be  proved  by  the  production  of  the  original 
certificate. 

Sec.  3.  Any  banking  association  organized  under 
the  National  Bank  Act  shall  be  entitled  to  member- 
Quaiification  ^^^^P  "^  ^^^^  clearing  house  of  its  district, 
of  members,  organized  under  this  act,  on  presenting 
to  the  said  clearing  house  a  certificate  from  the 
comptroller  of  the  currency  that  such  association 
has  complied  with  all  the  provisions  required  to  be 
complied  with  before  commencing  the  business  of 
banking,  and  that  such  association  is  authorized 
to    commence   such    business ;    and    any  banking 


HEARING  BEFORE   THE  COMMITTEE     25 

association  organized  under  the  laws  of  any  State 
shall  be  entitled  to  membership  in  the  clearing 
house  of  its  district  on  presenting  a  certificate 
from  the  superintendent  of  banking  of  said  State 
that  such  association  has  comphed  with  all  the 
provisions  of  the  state  law  required  to  be  complied 
with  before  commencing  the  business  of  banking, 
and  that  such  association  is  authorized  to  commence 
such  business ;  provided  that  such  state  banking 
association  shall  maintain  reserves  in  lawful  money 
as  provided  in  sections  94  to  105  inclusive  of 
chapter  five  of  the  National  Bank  Act,  as 
amended. 

Sec.  4.  That  every  association  formed  pursuant 
to  the  provisions  of  this  act  shall,  from  the  date  of 
the  execution  of  its  organization  certificate,  be  a 
body   corporate,    but    shall   transact   no  corporate 
business  except  such  as  may  be  incidental  p^^^"- 
to    its  organization,  and    necessarily   preliminary, 
until  authorized    by  the    comptroller    of  the  cur- 
rency to  commence  the  business  of  effecting  clear- 
ances.      Such   associations    shall    have   power   to 
adopt    a  corporate  seal,  and   shall   have 
succession  by  the  name  designated  in  its 
organization  certificate  for  the  period  of  twenty 
years  from  its  organization,  unless  sooner  ^^^^^  ^^ 
dissolved  according  to  the  provisions  of  existence, 
its  articles  of  association  or  by  act  of  the  banks 
owning  two  thirds  of  the  capital  stock  represented 
in  the  association,  or  unless  the  franchise  shall  be 
forfeited  by  a  violation  of  this  act ;  by  such  name 


26  FEDERAL   CLEARING  HOUSES 

it  may  make  contracts,  sue  and  be  sued,  complain 
Contracts,  and  defend  in  any  court  of  law  or  equity 
officers.  as  fully  as  natural  persons  ;  it  may  elect 
or  appoint  directors,  and  by  its  board  of  directors 
appoint  a  president,  vice-president,  treasurer,  and 
other  officers,  define  their  duties,  require  bonds  of 
them,  and  fix  the  penalty  thereof,  dismiss  said 
officers,  or  any  of  them,  at  pleasure,  appoint  others 
to  fill  their  places,  and  exercise  under  this  act  all 
,   .^   , ,      such  incidental  powers  as  shall  be  neces- 

Incidental  -•• 

powers.  ^^Yj  ^^  carry  on  the  business  of  a  clearing 
house  for  the  settlement  of  money  transactions  by 
the  mutual  set-off  of  debits  and  credits,  commonly 
called  making  clearances  for  banks,  and  by  obtain- 
ing and  issuing  to  the  banks  composing  the  associ- 
ation notes  according  to  the  provisions  of  this  act, 
Actastrus-  and  by  acting  as  trustee  for  the  note 
hoMer."°  ^  holders  in  accordance  with  the  provisions 
of  this  act,  by  receiving  and  holding  in  trust  secu- 
rities pledged  by  the  members  of  the  association 
as  collateral  to  the  notes  issued  to  them,  to  be 
called  "clearing-house  currency,"  and  by  acting 
Act  for  mem-  for  the  mcmbcrs  of  the  association  in 
daUon.^^^°"  their  united  capacity  when  authorized  to 
do  so  by  a  majority  vote  of  said  members  ;  and  its 
board  of  directors  shall  also  have  power  to  define 
and  regulate  by  by-laws  not  inconsistent 
^  ^^^'  with  the  provisions  of  this  act  the  man- 
ner in  which  its  directors  shall  be  elected  or  ap- 
pointed, its  officers  appointed,  its  property  trans- 
ferred, its  general  business  conducted,  and  all  the 


HEARING  BEFORE  THE  COMMITTEE     27 

privileges  granted  by  this  act  to  associations 
organized  under  it  shall  be  exercised  and  enjoyed  ; 
and  its  usual  business  shall  be  transacted  at  an 
office  or  banking  house  located  in  the  place  speci- 
fied in  its  organization  certificate. 

Sec.  5.  That    the    affairs  of    every   association 
shall  be  managed  by  not  less  than  nine 

,     ,,   ,  .      Directors. 

directors,  one  of  whom  shall  be  the  presi- 
dent,  a   majority  of  whom  shall  be    directors  in 
banks,  members  of  the  association,  which  are  or- 
ganized under  the  National  Currency  Act.     Every 
director  shall,  during  his  whole  term  of   service, 
be  a  citizen  of  the  United  States,  and  at  QuaMcar 
least  two  thirds    of   the    directors    shall  "°""°^- 
have  resided  in  the  State,  Territory,  or  district  in 
which  such  association  is    located   one  year    next 
preceding  their  election  as  directors,  and  be  resi- 
dents of  same  during  their  continuance  in  office. 
Each  director  when  appointed  or  elected  o^thsof 
shall  take  an  oath  that  he  will,  so  far  as  ^i^^^tors. 
the  duty  devolves  on  him,  diligently  and  honestly 
administer  the  affairs  of  such  association  and  not 
knowingly  violate,  or  willingly  permit  to  be  vio- 
lated, any  of  the  provisions  of  this  act,  which  oath, 
subscribed  by  himself  and  certified  by  the  officer 
before  whom    it    is    taken,  shall    be    immediately 
transferred  to    the    comj)troUer    of  the    currency, 
and  by  him  filed  and  preserved  in  his  office.     At 
the  annual  meetings  there  shall  be  ap-  Loancom- 
pointed  or    elected    a  loan    committee,    °''"^^- 
whose  duties  shall  be  as  described  in  sections  ten 


28  FEDERAL   CLEARING  HOUSES 

and  eleven  of  this  act.  Members  of  this  committee 
When  eiigi-  shall  not  be  eligible  for  reelection  or  re- 
eiecUoJ.^"  appointment  until  one  year  after  their 
terms  of  office  shall  have  expired.  They  shall  be 
divided  into  three  classes  at  their  first 
election  or  appointment,  one  third  shall 
serve  one  year,  one  third  two  years,  and  one  third 
three  years,  and  at  every  election  or  appointment 
thereafter  they  shall  be  elected  or  appointed  for  a 
term  of  three  years. 

Sec.  6.  That  the  directors  of  any  association  first 
elected  or  appointed  shall  hold  their  j^laces  until 
Tenure  of  tlicir  succcssors  shall  be  elected  and  quali- 
directors.  ficd.  All  subscqucut  elcctious  shall  be 
held  annually  on  such  day  in  the  month  of  Janu- 
ary as  may  be  specified  in  the  articles  of  associa- 
^,  ,.  tion,  and  directors  so  elected  shall  hold 

Elections  ' 

^'^^'  their  places  for  one  year,  and  until  their 

successors  are  elected  and  qualified ;  but  any  di- 
rector having  in  any  manner  become  disqualified 
shall  thereby  vacate  his  place.  Any  vacancy  in 
the  board  shall  be  filled  by  appointment  by  the 
remaining  directors,  and  any  director  so  appointed 
shall  hold  his  place  until  the  next  election.  If 
Failure  to  from  auy  cause  an  election  of  directors 
eiection?"^^  shall  uot  bo  made  at  the  time  appointed, 
the  association  shall  not  for  that  cause  be  dissolved, 
but  an  election  may  be  held  on  any  subsequent 
day,  thirty  days'  notice  thereof  in  all  cases  having 
been  given  in  a  newspaper  published  in  the  city, 
town,  or  county  in  which  the  association  is  located. 


HEARING  BEFORE   THE  COMMITTEE     29 

If  the  articles  of  association  do  not  fix  the  day  on 
which  the  election  shall  be  held,  or  if  the  election 
should  not  be  held  on  the  day  fixed,  the  day  for 
the  election  shall  be  designated  by  the  board  of 
directors  in  their  by-laws  or  otherwise  :  Provided^ 
That  if  the  directors  fail  to  fix  the  day,  as  afore- 
said, banks  representing  two  thirds  of  the  capital 
stock  represented  in  the  association  may. 

Sec.  7.  That  in  all  elections  of  directors,  and  in 
deciding  all  questions  at  meetings  of  members  of 
the  association,  each  bank  member  shall 

Represents^ 

be   entitled  to   a  representation  equal  to  ^^•'^  ?*  ^^"^ 

^  ^  members  in 

the  minimum  nmnber  of  directors  allowed  elections. 
by  law  to  said  bank,  but  no  bank  organized  under 
a  state  or  territorial  law  shall  be  entitled  to  a 
greater  representation  at  such  meetings  than  that 
of  a  national  bank.  Directors  of  a  bank  who 
shall  be  appointed  to  represent  said  bank  at  meet- 
ings of  the  association  may  vote  by  proxy  duly 
authorized  in  writing,  but  no  officer,  clerk,  teller, 
or  bookkeeper  of  such  association  shall  act  as 
proxy,  and  no  bank  any  of  whose  liabilities  are 
past  due  and  unpaid  shall  be  allowed  rei3resenta- 
tion  in  the  board  of  directors  or  at  the  meetings  of 
the  association. 

Sec.  8.  That  if,  upon  a  carefid  examination  of 
the  facts  so  reported,  and  of  any  other  facts  which 
may  come  to  the  knowledge  of  the  comptroller, 
whether  by  means  of  a  special  commission  ajD- 
pointed  by  him  for  the  purpose  of  inquiring  into 
the  condition  of  such  association  or  otherwise,  it 


30  FEDERAL   CLEARING  HOUSES 

shall  appear  that  such  association  is  lawfully  en- 
titled to  commence  the  business  of  a  clearing 
house  as  described  in  this  act,  the  comptroller 
Com  troi  shall  givc  to  such  association  a  certifi- 
ler'scertifi-    Q^ite.   uuder  his  hand   and   official    seal, 

cate  of  '  ' 

authority.  ^\^^^  sucli  associatiou  has  complied  with 
all  the  provisions  of  tliis  act  required  to  be  com- 
plied with  before  being  entitled  to  commence  the 
business  of  a  clearing  house  under  it,  and  that 
such  association  is  authorized  to  commence  said 
business  accordingly  ;  and  it  shall  be  the  duty  of 
Publication  the  associatiou  to  cause  said  certificate  to 
cate.  be  published  in  the  city  or  county  where 

the  association  is  located  for  at  least  sixty  days 
after  the  issuing  thereof. 

Sec.  9.  That  the  clearing-house  association  or- 
ganized under  this  act,  in  the  chief  commercial  city 
Clearing  iu  cach  State,  or  in  the  city  most  cen- 
issue.  tral  and  convenient  for  business  in  each 

State,  or  any  clearing  house  so  organized  effecting 
f^    ■  .o.v,    bank  clearinsrs  of  over  two  hundred  mil- 

One  in  each  o 

State.  jJqj^  dollars  annually,  to    be   designated 

and  approved  by  the  comptroller  of  the  currency, 

shall  be  made  a  clearing  house  of  issue. 

clearings       And  if    tlicrc    sliall  be    more   than   one 

of  over 

$200,000,000    clearino^  house  of  issue  in  a  State,  then 

annually  to  *=" 

housero?^     the    comptroller  of    the   currency    shall 

issue.  divide  the  State  into  clearing-house  dis- 

^  „      tricts,  and  banks  in   each  State  or   dis- 

ComptroUer  ' 

statefiito  *^'^^*  ^^^^^  ^^  business  only  with  the 
housl"^'  clearing  house  of  issue  in  their  State  or 
districts.       district. 


HEARING  BEFORE   THE  COMMITTEE     31 

Sec.  10.    That  a  clearing  house  of  issue  shall 
be  authorized  and  empowered  to  receive  from  its 
bank  members,  or  from  any  bank  mem-  ^^^^^^  ^^ 
ber  of  a  clearing  house  within  its  State  ^^^^^^ 
or  district,  with  the  approval  of  the  di-  ^^^"^• 
rectors  of  said  clearing  house,  commercial  assets, 
promissory    notes,  bills  of    exchange,   convertible 
bonds    and    stocks,  and   other  securities  __ 

'  May  receive 

and  evidences  of  debt  as  collateral  secu-  as^oiiateJai 
rity  for  the  circulating  notes  of  the  said  to^^^^ncy. 
association,   to   be  issued  as   provided  in  this  act, 
and  on  the  approval  of  the  value  of  said  commer- 
cial assets  by  its  loan  conmiittee,  the  said  clearing 
house  of  issue  may  deliver  to  said  bank  ^^  advance 
member  seventy-five  per  centum  of  said  pe^cent^"^^ 
value  in  its  said  circidating  notes  as  an  cSatilTg 
advance  upon  said  pledged  property,  and  "^*®^' 
shall  require  from  said  bank  member  its  promis- 
sory note   of  equal  amount,  which  note  shall  be 
in  form  as    approved    by    said    clearinfij 
house  of  issue.     The  bank  member  tak-  ber  must 

engage  to 

ins:  said  circulating^  notes  shall  eno^aore  to  redeem  at 

o  ^  »  ^    ^  all  tunes  and 

redeem  them  in  the  lawful  money  of  the  ^^«  ^<^^'- 

•^  tional  secu- 

United  States  at  all  times  upon  demand  ^^*y- 
of  payment  duly  made  during  the  usual  hours  of 
business  at  the  office  of  such  bank  member,  and 
also  when  called  upon  to  do  so  by  the  clearing- 
house issuing  the  notes,  and  to  give  any  additional 
collateral  needed  to  restore  any  depreciation  in  the 
value  of  the  assets  pledged,  on  demand ;  and  on 
failure  to  comply  with  such  demands  before  the 


32  FEDERAL   CLEARING  HOUSES 

close  of  business  hours  of  the  day  when  made, 
said  bank  member  shall  be  adjudged  in 
default,  and  shall  be  thereupon  closed 
pending  an  examination  by  a  committee  from  the 
association  which  issued  the  notes.  On  recom- 
mendation by  the  examining  committee  the  loan 
Provision  committce  shall  proceed  to  liquidate  the 
lug  loans.  loan  by  turning  the  securities  into  cash, 
in  accordance  with  the  method  provided  in  sec- 
tion eleven.  The  bank  member  taking  said  notes 
Provision  may  rclcasc  its  securities  from  pledge  by 
advances.  depositing  with  the  said  clearing  house 
of  issue  clearing-house  currency,  United  States 
legal-tender  notes,  or  coin  certificates,  with  any 
charges  made  by  said  clearing  house  of  issue, 
whereupon  it  shall    be    entitled    to  and 

Charges  ^     ^ 

regulated      shall  rcccivc  all  its  securities  so  pledg-ed. 

by  each  ^  *=' 

clearing        ^lie  cliaro^cs  sliall  be  reo^ulated  by  each 

house  of  ^  n  J 

issue.  clearing  house  of  issue.     Upon  the  re- 

ceipt of  such  deposit  the  clearing  house  of  issue 
Advertise-  shall  iimiicdiately  give  notice  in  a  news- 
demptionof    paper    published    in   the    city,  town,   or 

circulating  i  •    i       i  •       •  •      t 

notes.  county  m  which  the  association  is  located, 

which  notice  shall  be  published  at  least  once  a 
week  for  six  months  successively,  that  the  notes  of 
such  bank  member  will  be  redeemed  at  par,  and 
that  all  the  outstanding  circulating  notes  of  such 
Must  be  bank  member  must  be  so  presented  for 
ip  six  years,  redemption  within  six  years  from  the 
date  of  such  notice,  and  all  notes  which  shall  not 
be   thus  presented   for  redemption    and  payment 


HEARING  BEFORE  THE  COMMITTEE     33 

within  tlie  time  specified  in  sucli  notice  shall  cease 
to  be  a  charge  upon  the  funds  in  the  hands  of  the 
clearing  house  for  that  purpose.  At  the  expiration 
of  such  notice  it  shall  be  lawful  for  the  clearing 
house  of  issue  to  surrender,  and  such  Bank  mem- 
bank  member,  or  its  legal  representative,  to  receive 

•   1     1  •  n      1  money  re- 

shall  be  entitled  to  receive,  all  the  money  maining 

after  re- 

remaining  after  such  redemption,  except  demption. 
so  much  thereof  as  may  be  necessary  to  pay  the 
reasonable  expenses  chargeable   against    the  said 
accounts,  including  the  payment  for  the  publica- 
tion of  the  above-mentioned  notices. 

Sec.  11.  That  each  bank  member  taking  such 
circulating  notes  shall  guarantee  the  clearing  house 
of    issue   from  loss  resultiiio*  from  such  ^ 

^  Guarantee 

issue  to  them,  and  in  case  of  a  default  in  9}  "ot^s  by 

'  bank  mem- 

the  payment  of  a  loan  when  demanded  ^''• 
by  the  clearing  house  of  issue  or  of  default  arising 
in  any  other  manner,  then  it  shall  be  the  duty  of 
said  clearino'  house  of  issue  to  levy  upon  ^ 

"->  ./        X  Guarantee 

all  the  clearing  houses  in  said  State  or  I'^fg^Jt^j'S?^ 
district,  in  proportion  to  the  capital  of  <iJstrict. 
their  bank  members,  a  sufficient  sum  to  provide 
for  the  payment  of  said  loan,  which  sum  shall  be 
held  for  the  payment  and  redemption  of  the  cir- 
culating notes  so  issued.  And  if  enough  money 
cannot  be  obtained  by  such  assessments,  then  it 
shall  be  the  duty  of  said  clearing^  house  ^ 

*'  ^  Guarantee 

of  issue  to  report  to  the  comptroller  of  ^y  ^"  ^i^ar- 

^  ^  ing  houses 

the    currency  the  fact  of    said    default,  Se°r  tws 
and  it  shall  be  his  duty  to  levy  a  further  *^*- 


34  FEDERAL   CLEARING  HOUSES 

assessment  upon  all  the  clearing  houses  organized 
under  this  act  in  all  the  States  and  Territories 
until  such  sum  is  secured,  in  which  case  the  funds 
so  raised  by  the  comptroller  shall  be  paid  by  him 
to  the  treasurer  of  the  United  States  as  a  special 
fund  to  pay  the  circulating  notes  of  the  defaidting 
bank  member ;    and  he  shall  appoint  a 

Liquidation  .    . 

of  loans  by     reccivcr  for  the    collateral   securities  to 

comptrol-  IP!  1  in 

i^"^-  the  loan  or    loans  in  defaidt,  who  shall 

take  possession  thereof  and  turn  them  into  cash 
and  distribute  the  proceeds  to  the  banks  which 
have  contributed  to  the  assessment,  and  any  sur- 
plus after  reimbursing  them  their  advances  shall 
be  handed  over  to  the  bank  member  in  defaidt  or 
Liquidation  its  legal  representative.  But  if  the  as- 
SieSg^^  sessment  by  the  clearing  house  of  issue 
issu?  °  on  the  banks  of  its  State  or  district  is 
sufficient  to  provide  the  needed  funds,  then  the 
collaterals  shall  be  administered  upon  and  turned 
into  cash  by  the  loan  committee  or  by  a  liquidating 
committee  of  said  clearing  house  of  issue,  and  the 
cash  proceeds  shall  be  appropriated  as  above  pro- 
vided. At  no  time  shall  the  total  amount  of  such 
notes  issued  to  any  bank  member  exceed 

Circulation  .  •  i    • 

limited  to      the  amount  at  such  time  actually  paid  m 

par  of  capi- 

tai  stock.  of  the  capital  stock  of  the  bank  member 
so  applying.  And  said  loan  committee  are 
charged  with  the  duty  of  supervising  said  loans 
Duties  of  so  as  to  maintain  the  margin  of  value  of 
mft^teTs™'  the  collateral  security,  and  shall  demand 
additional  securities  to  make  good  any  depreciation 


HEARING  BEFORE   THE  COMMITTEE     35 

in  their  value,  and  they  may  allow  withdrawals 
and  substitutions  of  securities  which  shall  not 
diminish  the  said  value. 

Sec.  12.  That  a  clearing  house  of  issue  shall 
be  authorized  and  empowered  to  receive  from  its 
bank  members  o^old  coin  of  the  United  ^^  ^     ,^ 

*  U.  S.  gold 

States  of  full  weight,  and   may  deliver  ^^j.^^''^^ 
to    said    bank    member    its    circulating  goff[ssueci 
notes  at  the  par  of  the  gold  coin  so  de-  t^^^^^o"- 
posited,  and  the  said  bank  member  shall  engage  to 
redeem  said  circulating    notes  at  all  times  when 
called  upon  to   do  so    by  the    association    issuing 
them.       Such  notes   may  be  issued  to  any  bank 
member  in  exchange  for  gold  coin  without  regard 
to  the  amount  of  the  capital  stock  of  the  bank  de- 
positing the  gold    coin.     The    clearing    house  of 
issue  shall  make  report  of  notes  so  issued  to  the 
comptroller  of    the  currency  and  shall   make  no 
charge  for  the  issue  of  its  notes  against  the  deposit 
of  gold. 

Sec.  13.  That  in  order  to  furnish  suitable 
notes  for  circulation  as  provided  in  this  act, 
the     comptroller     of     the    currency    is  ^ 

A  "^  Preparation 

hereby  authorized  and  required,  under  J^^^gg^^jj"? 
the  direction  of  the  Secretary  of  the  ^^'^^y- 
Treasury,  to  cause  plates  and  dies  to  be  engraved, 
in  the  best  manjier,  to  guard  against  counterfeit- 
ing and  fraudulent  alterations,  and  to  have  printed 
therefrom,  and  numbered,  such  quantity  of  circu- 
lating notes,  in  blank,  of  the  denominations  of  one 
dollar,  two  dollars,  five  dollars,  ten  dollars,  twenty 


36  FEDERAL   CLEARING  HOUSES 

dollars,  fifty  dollars,  one  hundred  dollars,  five 
hundred  dollars,  and  one  thousand  dollars,  as  may 
be  required  to  supply  under  this  act  the  associa- 
what  notes  tious  entitled  to  receive  the  same,  which 
press.  notes  shall  express  upon  their  face  that 

they  are  secured  by  de230sit  with  the  clearing 
house  of  issue  at  (naming  the  city)  of  commercial 
assets  at  seventy-five  per  centum  of  their  market 
value,  or  of  gold  coin  at  its  par  value,  and  that 
said  clearing  house  holds  said  assets  or  gold  coin 
as  trustee  for  the  note  holder  to  secure  their  pay- 
ment, which  pajTiient  is  guaranteed  by 
guaranteed     tlic  associatcd  bauks  of  the  United  States 

by  the  asso- 

oKhe  u^s^^  through  any  clearing  house,  and  shall  be 
cferri?'  ^°y  attested  by  the  signatures  of  the  presi- 
house.  dent  or  vice-president  and  treasurer  of 

said  clearing  house  of  issue  as  for  account  of  the 
bank  member  receiving  said  notes ;  and  on  requi- 
comptroiier  sitiou  of  a  clearing  house  of  issue  the 
notes.  comptroller  of  the  currency  shall  forward 

the  amount  of  blank  notes  in  denominations  as 
called  for  as  may  be  required  to  supply  the  bank 
member  entitled  to  receive  the  same  under  this 
act. 

Sec.  14.  That  after  any  such  clearing  house  of 
issue  shall  have  caused  its  promises  to  j)ay  such 
notes  on  demand  to  be  signed  by  the  j^resident  or 
vice-president  and  treasurer  thereof,  in  such  man- 
Mode  of  is-  ^^^  ^^  ^^  make  them  obligatory  promis- 
Bue  of  notes,  g^^.y  notcs,  payable  oil  demand,  such 
clearing  house  of  issue  shall  deliver  them  to  the  bank 


HEARING  BEFORE   THE  COMMITTEE     37 

member  entitled  to  receive  them,  who  is  hereby 
authorized    to    issue    and    circulate    the   Notes  to  be 

received  at 

same  as  money,  and  the   same  shall  be  parataii 

^  ^  clearing 

received  at  par  at  all  the  clearing  houses   houses. 
in  the  United  States   organized  under   this  act ; 
and  said  clearing  house    of  issue    shall  Amount  of 

n  n     issues  and 

thereupon  forward  to  the  comptroller  oi   collateral 

.  therefrom  to 

the    currency  a  certificate    settmo-  forth  be  certified 

•^  ^  to  corap- 

the  amount  of  notes  delivered,  the  name  troUer. 
of    the    bank    member    receiving    same,    and    the 
amount  of  the  collateral  security  held  in  trust  for 
their  redemption. 

And  every  bank  member  of  every  clearing 
house  oro^anized  under  this  act  shall  take  and  re- 
ceive  at  par,  for  any  debt  or  liability  to 

in  1  -n       •  11  ^^^^^  *^  ^® 

it,  any  and    all  notes  or  bills  issued    by  received  by 

'  ♦^  ,  .      -^     all  banks  for 

any  clearin^:   house    of   issue    organized  any  debts 

JO  o  (jue  them. 

under  this  act. 

The  meeting  together  of  any  persons  who  are 
officers,  agents,  or  employees  of  persons,  firms,  or 
corporations  in  any  one  or  more  places  Definition  of 

,  ,  clearing 

once  in  thirty  days  or  oftener,  for  the  touse. 
purpose  of  exchanging,  pajdng,  or  in  any  other  way 
satisfying  any  obligations  used  in  commerce  among 
the  several  States  by  any  two  or  more  of  such  per- 
sons, firms,  or  corporations,  or  for  the  purpose  of 
the  settlement  of  money  transactions  by  the  mutual 
set-off  of  debits  and  credits,  commonly  called  mak- 
ing clearances  for  banks,  shall  constitute  such  per- 
sons, firms,  or  corporations  represented  in  such 
meeting  a  clearing-house  association,  for  the  pm-- 


38  FEDERAL   CLEARING  HOUSES 

pose  of  the  taxation  herein  imposed,  and  such 
persons,  firms,  or  corporations  represented  shall 
Tax  on  ^^  JP^^^^J   ^^^    scvcrally  liable   to   pay, 

housis  not  ai^<i  shall  pay,  into  the  Treasury  of  the 
unS'tws  United  States  a  duty  in  amount  equal  to 
*^*"  one   one-fiftieth  of   one   per   centum  on 

the  aggregate  amount  of  all  such  obligations  ex- 
changed, paid,  or  in  any  way  satisfied,  or  on  the 
aggregate  amount  of  the  money  transactions  settled 
by  the  mutual  set-off  of  debits  and  credits,  at  each 
and  every  meeting  of  persons  acting  for  such  per- 
sons, firms,  or  corporations :  Provided^  however^ 
That  in  case  any  such  clearing-house  association 
pays  one  half  of  the  tax  herein  imposed  on  or 
before  the  day  it  is  due  and  payable,  the  other  liaK 
Remission  sliall  bc  and  is  hereby  remitted:  And 
of  such  tax.  rpr^(yi^{^Q^  further^  That  the  tax  herein 
imposed  on  clearing-house  associations  herein  de- 
scribed shall  be  wholly  remitted  to  all  members  of 
clearing  houses  that  are  incorporated  under  this 
act. 

Sec.  15.  That  it  shall  be  the  duty  of  the  clear- 
mg  house  of  issue  to  receive  worn-out  or  mutilated 
Reissue  for  circulating  notes  issued  by  it  to  any 
mutnXd^'^  bank  member,  and  also,  on  due  proof  of 
circulations.  ^^  dcstructiou  of  any  such  circulating 
notes,  to  deliver  in  place  thereof  other  circulating 
notes  of  like  tenor  and  amount.  And  such  worn- 
out  or  mutilated  notes,  after  a  memorandum  shall 
have  been  entered  in  the  proper  books,  as  may  be 
established  by  the  clearing  house  of  issue,  as  well 


HEARING  BEFORE   THE  COMMITTEE     39 

as  all  circulating  notes  which  shall  have  been  paid 
or  surrendered  to  be  canceled,  shall  be  burned  to 
ashes  in  presence  of  three  persons,  one  to  be  ap- 
pointed by  the  comptroller  of  the  currency,  one 
by  the  clearing  house  of  issue,  and  one  by  the 
bank  member  on  whose  account  they  were  issued ; 
and  a  certificate  of  such  burning  shall  be  made  on 
the  books  of  the  clearing  house  of  issue,  and  dupli- 
cates forwarded  to  the  comptroller  of  the  cur- 
rency and  to  the  bank  member  whose  notes  are 
thus  canceled. 

Sec.  16.    That  it  shall  be  unlawful  for  any  offi- 
cer acting  under  the  provisions  of  this  act  to  coun- 
tersign or  deliver  to  any  association  or  to   p^^^^^  ^^^ 
any  other  company  or  persons  any  cir-  SJer'of 
culating  notes  contemplated  by  this  act,   °°*^^^" 
except  as  hereinbefore  provided  and  in  accordance 
with  the  true  intent  and  meaning  of  this  act.    Any 
officer  who  shall  violate  the  provisions  of  this  sec- 
tion shall  be  deemed  guilty  of  a  high  misdemeanor, 
and  on  conviction  thereof  shall  be  punished  by  fine 
not  exceeding  double  the  amount  so  countersigned 
and  delivered  and  imprisonment  not  less  than  one 
year  and  not  exceeding  fifteen  years,  at  the  discre- 
tion of  the  court  in  which  he  shall  be  tried. 

Sec.  17.  That  it  shall  be  lawful  for  any  such 
association  to  purchase,  hold,  and  convey  real  es- 
tate as  follows :  — 

First.  Such  as  shall  be  necessary  for  its  imme- 
diate accommodation  in  the  transaction  of  ^^^^  eaibaiba. 
its  business. 


40  FEDERAL   CLEARING  HOUSES 

Second.  Such  as  shall  be  mortgaged  to  it  in 
good  faith  by  way  of  security  for  debts  previously 
contracted. 

Third.  Such  as  shall  be  conveyed  in  satisfaction 
of  debts  previously  contracted  in  the  course  of  its 
dealings. 

Fourth.  Such  as  it  shall  purchase  at  sales  under 
judgment,  decrees,  or  mortgages  held  by  such  asso- 
ciation, or  shall  purchase  to  secure  debts  due  to 
said  association. 

Such  association  shall  not  purchase  or  hold  real 
estate  in  any  other  case  or  for  any  other  purpose 
than  as  specified  in  this  section,  nor  shall  it  hold 
the  possession  of  any  real  estate  under  mortgage, 
or  hold  the  title  and  possession  of  any  real  estate 
purchased  to  secure  any  debts  due  to  it  for  a 
longer  period  than  five  years. 

Sec.  18.  That  the  plates  and  special  dies  to  be 
procured  by  the  comptroller  of  the  currency  for 
Control  of  thc  printing  of  such  circulating  notes 
dies.  shall  remain  under  his  control  and  direc- 

tion, and  the  expense  necessarily  incurred  in  exe- 
cuting the  provisions  of  this  act,  respecting  the 
Expense  to  pi'ocuriug  of  sucli  uotcs  and  all  other 
oS  cleaning  expeuscs  of  thc  burcau,  shall  be  assessed 
bouses.  each  year  upon  the  clearing  houses  or- 
ganized under  this  act,  in  proportion  to  the  cajiital 
stock  of  their  members. 

Sec.  19.  That  the  comjDtroUer  of  the  currency, 
with  the  approbation  of  the  Secretary  of  the  Trea- 
sury, as  often   as  shall  be  deemed   necessary  or 


HEARING  BEFORE   THE  COMMITTEE     41 

proper,  or  at  the  request  of  any  clearing  house, 
shall  appoint  a  suitable  i^erson  or  persons   ciearing- 

^  ^  ^  Z,    .  (,    house  exam- 

to  make  an  examination  of  the  affairs  ot  iners. 
every  association  organized  under  this  act,  which 
person  shall  not  be  a  director  or  other  officer  in 
any  association  whose  affairs  he  shall  be  appointed 
to  examine,  and  who  shall  have  power  to  make  a 
thorough  examination  into  all  the  affairs  of  the 
association,  and  in  doing  so  to  examine  any  of  the 
officers  and  agents  thereof  on  oath,  and  shall  make 
a  full  and  detailed  report  of  the  condition  of  the 
association  to  the  comptroller,  who  shall  fix  the 
compensation  for  his  services. 

Sec.  20.  That  every  president,  director,  trea- 
surer, teller,  clerk,  or  agent  of  any  association 
who  shall  embezzle,  abstract,  or  willfully  Penalty  for 

official  mal- 

misapply  any  of  the  moneys,  funds,  or  feasance. 
credits  of  the  association,  or  shall,  without  author- 
ity from  the  directors,  issue  or  put  in  circulation 
any  of  the  notes  of  the  association,  or  shall,  with- 
out such  authority,  assign  any  note,  bond,  draft, 
bill  of  exchange,  mortgage,  judgment,  or  decree, 
or  shall  make  any  false  entry  in  any  book,  report, 
or  statement  of  the  association  with  intent  in 
either  case  to  injure  or  defraud  the  association,  or 
any  other  company,  body,  politic  or  corporate,  or 
any  individual  person,  or  to  deceive  any  officer  of 
the  association,  or  any  agent  appointed  to  examine 
the  affairs  of  any  such  association,  shall  be  deemed 
guilty  of  a  misdemeanor,  and  upon  conviction 
thereof  shall  be  punished  by  imprisonment  not  less 
than  five  nor  more  than  ten  years. 


42  FEDERAL   CLEARING  HOUSES 

Sec.  21.  That  every  person  who  shall  mutilate, 
cut,  deface,  disfigure,  or  perforate  with  holes,  or 
Penalty  for    shall  uuitc  or  cemeiit  together,  or  do  any 

mutilating  i  i  •  •  i     i 

currency.  otlicr  tiling  to  any  note  issued  by  any 
such  association,  or  shall  cause  or  procure  the  same 
to  be  done,  with  intent  to  render  such  note  unfit  to 
be  reissued  by  said  association,  shall,  upon  convic- 
tion, forfeit  fifty  dollars  to  the  association  who 
shall  be  injured  thereby,  to  be  recovered  by  action 
in  any  court  having  jurisdiction. 

Sec.  22.  That  if  any  person  shall  falsely  make, 
forge,  or  counterfeit,  or  cause  or  procure  to  be 
made,  forged,  or  counterfeited,  or  willingly  aid  or 
assist  in  falsely  making,  forging,  or  counterfeiting, 
any  note  in  imitation  of,  or  purporting  to  be  in 
imitation  of,  the  circulating  notes  issued  under  the 
provisions  of  this  act,  or  shall  pass,  utter,  or  pub- 
lish, or  attempt  to  pass,  utter,  or  publish,  any 
Penalty  for  ^^^^^^  forgcd,  or  Counterfeited  note,  pur- 
ii?g  circS'i'  porting  to  be  issued  by  any  association 
*'°"*  doing  business  under  the   provisions   of 

this  act,  knowing  the  same  to  be  falsely  made, 
forged,  or  counterfeited,  or  shall  falsely  alter,  or 
cause  or  procure  to  be  falsely  altered,  or  willingly 
aid  or  assist  in  falsely  altering,  any  such  circulat- 
ing notes,  issued  as  aforesaid,  or  shall  pass,  utter, 
or  publish,  or  attempt  to  pass,  utter,  or  publish,  as 
true,  any  falsely  altered  or  spurious  circulating 
note  issued,  or  purporting  to  have  been  issued,  as 
aforesaid,  knowing  the  same  to  be  falsely  altered 
or  spurious,  every  such  person    shall  be  deemed 


HEARING  BEFORE   THE  COMMITTEE     48 

and  adjudged  guilty  of  felony,  and  being  thereof 
convicted  by  due  course  of  law  shall  be  sentenced 
to  be  imprisoned  and  kept  at  hard  labor  for  a 
period  of  not  less  than  five  years  nor  more  than 
fifteen  years,  and  fined  in  a  sum  not  exceeding  one 
thousand  dollars. 

Sec.  23.  That  if  any  person  shall  make  or  en- 
grave, or  cause  or  procure  to  be  made  or  engraved, 
or  shall  have  in  his  custody  or  possession  any  plate, 
die,  or  block  after  the  similitude  of  any  plate,  die, 
or  block  from  which  any  circidating  notes,  issued 
as  aforesaid,  shall  have  been  prepared  or  printed, 
with  intent  to  use  such  plate,  die,  or  block,  or 
cause  or  suffer  the  same  to  be  used,  in  forging  or 
counterfeiting  any  of  the  notes  issued  as  aforesaid, 
or  shall  have  in  his  custody  or  possession  any  blank 
note  or  notes  engraved  and  printed  after  ^^^^-^^  f^^ 
the  similitude  of  any  notes  issued  as  geSn^oT 
aforesaid,  with  intent  to  use  such  blanks,  "f^^i  ?Jr  dr-" 
or  cause  or  suffer  the  same  to  be  used,  in  ^"^^*^'*'°- 
forging  or  counterfeiting  any  of  the  notes  issued  as 
aforesaid,  or  shall  have  in  his  custody  or  possession 
any  paper  adapted  to  the  making  of  such  notes, 
and  similar  to  the  paper  upon  which  any  such 
notes  shall  have  been  issued,  with  intent  to  use 
such  paper,  or  cause  or  suffer  the  same  to  be  used, 
in  forging  or  counterfeiting  any  of  the  notes  issued 
as  aforesaid,  every  such  person,  being  thereof  con- 
victed by  due  course  of  law,  shall  be  sentenced 
to  be  imprisoned  and  kept  to  hard  labor  for  a 
term  not  less  than  five  nor  more  than  fifteen  years, 


44  FEDERAL   CLEARING  HOUSES 

and  fined  in  a  sum  not  exceeding  one  thousand 
dollars. 

Sec.  24.  That  it  shall  be  the  duty  of  the  comp- 
troller of  the  currency  to  report  annually  to  Con- 
gress at  the  commencement  of  its  session  :  — 

First.  A  summary  of  the  operations  and  condi- 
tion of  every  association  from  whom  reports  have 
Annual  re-  hccu  rcccivcd  the  prcccdiug  year,  at  the 
^^^*'  several  dates  to  which  such  reports  refer, 

with  an  abstract  of  the  whole  amount  of  their 
debts  and  liabilities,  the  amount  of  circulating 
notes  outstanding,  and  the  total  amount  of  means 
and  resources,  specifying  the  amount  of  lawful 
money  held  by  them  at  the  times  of  their  sev- 
eral returns,  and  such  other  information  in  relation 
to  said  associations  as  in  his  judgment  may  be 
useful. 

Second.  A  statement  of  associations  whose  busi- 
ness has  been  closed  during  the  year,  with  the 
amount  of  their  circulation  redeemed  and  amount 
outstanding. 

Third.  Any  amendment  to  the  laws  relative  to 
clearing  houses,  by  which  the  system  may  be  im- 
proved, and  the  security  of  the  holders  of  their 
notes  may  be  increased. 

Fourth.  The  whole  amount  of  the  ex2)enses  of 
carrying  out  the  provisions  of  this  act.  And  such 
report  shall  be  made  by  or  before  the  first  day  of 
December  in  each  year,  and  the  usual  number  of 
copies,  for  the  use  of  the  Senate  and  House,  and 
one  thousand  for  the  use  of  the  department,  shall 


HEARING  BEFORE   THE  COMMITTEE     45 

be  printed  by  the  public  printer  and  in  readiness 
for  distribution  at  the  first  meeting  of  Congress. 

Sec.  25.  That  the  clearing  houses  organized 
under  this  act  may  organize  among  themselves 
associations  to  include  the   banks  mem-  state  bank- 

,  -, .        .  ,     ers'  associa- 

bers  thereof  m  any  btate  or  district,  and  tions. 
may  hold  annual  conventions  and  meetings  at 
other  times,  for  the  formulation  of  rides  and  regu- 
lations for  the  conduct  of  their  affairs  and  for  the 
discussion  of  financial  subjects  and  for  the  preser- 
vation and  exchange  of  information  to  govern  the 
granting  of  credits,  and  when  approved  by  the 
Secretary  of  the  Treasury,  such  rules  and  regula- 
tions shall  be  binding  upon  the  banks  and  clearing 
houses  within  said  State  and  district. 

Sec.  26.  That  clearing  houses  organized  under 
this  act  may  form  a  national  association,  wliich 
shall  meet  in  convention  annually,  and  National 

bankers'  as- 

whose  object  shall  be  the  promotion  of  sociatious. 
the  interests  of  the  banks  of  the  United  States 
receiving  the  benefits  of  this  act,  and  said  conven- 
tion may  pass  rules  and  regulations  to  govern  the 
operations  of  clearing  houses  and  the  banks  con- 
nected with  same,  which,  when  approved  by  the 
Secretary  of  the  Treasury,  shall  be  binding  upon 
such  clearing  houses.  The  delegates  to  a  state 
or  district  convention  shall  number  one  himdred, 
and  to  a  general  convention  three  hundred,  which 
numbers  divided  into  the  aggregate  of  the  bank- 
ing capital  represented  will  give  in  each  case 
the  amount  of  capital  to  be  taken  as  the  basis  of 


46  FEDERAL   CLEARING  HOUSES 

representation.  Tlie  comptroller  of  tlie  currency- 
may  unite  banks  into  voting  groups  where  their 
separate  capital  is  below  the  basis  of  rej^resen- 
tation,  and  each  group  shall  be  entitled  to  one 
representative.  All  elections  of  representatives  to 
conventions  shall  be  by  a  majority  vote  of  the 
directors  entitled  to  vote  of  single  banks  and 
banks  composing  groups  ;  each  bank  shall  have  a 
vote  equal  to  the  minimum  number  of  directors 
allowed  to  it  by  law,  but  no  bank  shaU  be  allowed 
more  votes  than  shall  be  given  to  a  national  bank, 
and  no  bank  shall  have  more  than  one  representar 
live  in  the  national  association. 

Mr.  Gilman  addressed  the  committee  as  follows : 

statement  of  mr.  gilman 

Mr.  Chairman  and  Gentlemen  of  the  Com- 
mittee :  In  response  to  the  request  of  the  chair- 
man, I  will  state  that  my  place  of  business  is  in 
New  York  City.  I  have  been  a  banker  there  ever 
since  1862.  My  relations  have  been  all  over  the 
country,  East  and  West,  chiefly  outside  of  New 
York  City. 

The  Chairman.    A  private  banker  ? 

Mr.  Gilman.    Yes,  sir. 

The  Chairman.    What  is  the  firm  name  ? 

Mr.  Gilman.    Gilman,  Son  &  Co. 

With  your  leave  I  will  read  this  letter :  — 


HEARING  BEFORE   THE  COMMITTEE     47 

The  State  Bank  of  St.  Louis, 
St.  Louis,  Mo.,  April  9,  1898. 

Hon.  J.  H.  Walker, 

Chairman  Banking  Committee, 

House  of  Representatives,  Washington,  D.  C. 
Dear  Sir  :  I  see  your  committee  are  to  meet  on  the 
proposed    emergency  currency  plan  of    Mr.  Theodore 
Gihnan  on  the  13th  instant.     I  am  of  the  opinion  that 
some  plan  for  such  a  currency  ought  to  be  passed. 

You  will  find  in  Mr.  Oilman's  book  a  few  suggestions 
made  by  me  regarding  such  a  currency  and  a  schedule 
regarding  same. 

If  we  could  have  had  a  hundred  millions  of  such  cur- 
rency in  1893  it  would  have  saved  half  or  two  thirds 
the  ill  effects  of  the  panic.  It  may  be  the  present 
Cuban  trouble  will  make  some  such  measure  invaluable 
now.  I  can  but  think  something  in  this  direction  can 
be  made  of  immense  value  to  the  country. 
Very  respectfully  yours, 

Charles  Parsons. 

I  would  like  to  make  two  remarks  about  this 
letter.  One  is  I  was  immediately  struck  with  the 
similarity  of  this  opinion  of  Mr.  Parsons  to  that  of 
Mr.  J.  R.  McCulloch  in  1849  in  reference  to  the 
panic  of  1837. 

The  Chairman.  Mr.  McCuUoch  who  was  for- 
merly Secretary  of  the  Treasury  ? 

Mr.  GiLMAN.  No ;  Mr.  McCulloch  of  London, 
the  great  British  financial  authority.  He  wi-ote 
that  had  this  principle  of  a  secured  currency  been 
adopted  then,  the  crisis  of  1837  to  1839  would 
have  been  obviated  or  materially  mitigated.    Fifty 


48  FEDERAL   CLEARING  HOUSES 

years  afterwards  Mr.  Charles  Parsons  makes  the 
same  remark  in  reference  to  the  j)anic  of  1893. 

The  Chairman.  We  would  be  giad  if,  when 
you  refer  to  different  gentlemen,  you  would  state 
what  positions  they  hold  or  who  they  are. 

Mr.  GiLMAN.  Charles  Parsons  is  president  of 
the  State  Bank  of  St.  Louis,  Mo.,  and  a  former 
president  of  the  American  Bankers'  Association. 
I  would  also  call  your  attention  to  the  last  three 
words  of  Mr.  Parsons's  letter  —  "  to  the  country." 
He  says  :  "  I  think  something  in  this  direction  can 
be  made  of  immense  value  to  the  country."  He 
speaks  as  a  jjatriot  and  not  as  a  banker. 

Mr.  Gilman  then  proceeded  to  read  a  paper 
which  he  had  23re23ared,  as  follows  :  — 

TWO    SYSTEMS    OF    BANKING 

Mr.  Chairman  and  Gentlemen  :  There  are  * 
only  two  systems  of  banking  in  use  among  civilized 
nations.  One  system  is  that  in  which  each  bank 
has  a  separate  individual  existence  under  the  laws 
by  which  it  is  incorporated,  and  in  which  no  bank 
has  a  superior  position  or  different  functions  from 
any  other. 

The  other  system  is  that  in  which  some  banks 
have  different  functions  and  a  superior  position. 

The  perception  of  this  distinction  is  necessary 
to  the  right  understanding  of  the  phase  of  the 
banking  question  we  are  about  to  consider,  and  as 
examples  assist  in  the  understanding  of  abstract 
propositions,  your  attention  is  called  to  the  fact 


HEARING  BEFORE  THE  COMMITTEE     49 

that  there  are  now  in  the  hands  of  this  committee 
two  bills  which  represent  these  two  systems.  One 
is  the  bill  H.  R.  9725,  prepared  by  your  sub-com- 
mittee and  introduced  in  the  House  of  Representa- 
tives on  April  5,  1898,  and  the  other  is  bill  H.  R. 
9279,  which  is  the  subject  of  the  present  hear- 
ing. Bill  H.  R.  9725  represents  a  system  com- 
posed of  individual  banks,  and  bill  H.  R.  9279 
represents  a  graded  system. 

THE    COMPETITIVE    SYSTEM 

The  fundamental  points  of  difference  between 
these  two  systems  may  be  briefly  summed  up  as  fol- 
lows ;  While  bill  H.  R.  9725  has  incorporated  in 
it  some  special  features,  which  will  be  hereafter 
considered,  it  does  not  depart  from  or  change  the 
chief  characteristic  of  the  National  Bank  Act, 
which  is  that  it  provides  for  individual  independ- 
ent banks,  with  no  relations  to  each  other,  and  de- 
pendent for  their  solvency  upon  a  cash  reserve  of 
a  certain  percentage  of  their  obligations.  From 
this  it  necessarily  results  that  in  a  time  of  strin- 
gency each  individual  bank  becomes  a  competitor 
with  every  other  bank  for  the  cash  needed  to  re- 
plenish and  maintain  its  reserves,  and  the  only 
legal  means  for  keeping  up  the  required  percent- 
age of  lawful  money  is  by  restricting  discounts 
and  loans  and  compelling  the  business  public  to 
liquidate  and  pay  up.  The  methods  of  this  sys- 
tem all  naturally  gi-avitate  toward  and  end  in 
panic.     Proper   names    for   this   system    are   the 


50  FEDERAL   CLEARING  HOUSES 

ungraded,  or  competitive,  or  restrictive,  or  "  panic 
system,"  according  as  its  different  characteristics 
are  to  be  emphasized. 

THE    COOPERATIVE    SYSTEM 

Bill  H.  R.  9279,  on  the  other  hand,  provides  for 
the  incorporation  of  clearing  houses  with  limited 
functions,  differing  from  the  existing  national 
banks,  but  organically  connected  with  them,  chief 
among  the  functions  given  to  the  clearing  houses 
being  that  conferred  upon  at  least  one  in  each 
State,  which  empowers  such  clearing  house  to  re- 
ceive from  its  bank  members,  and  to  hold  as  trus- 
tees for  the  jDublic,  bank  assets,  and  to  issue 
thereon,  at  seventy-five  per  cent,  of  their  ascer- 
tained value,  circulating  notes  good  at  any  clearing 
house  in  the  land.  The  object  of  this  provision  is 
to  sustain  commercial  and  banking  credit  in  thnes 
of  lack  of  confidence,  by  providing  a  means  by 
which  demands  for  circulating  notes  of  undoubted 
credit  may  be  met,  and  thereby  commerce  and 
trade  be  sustained  without  shock  to  credit. 

By  this  system  functions  are  bestowed  on  clear- 
ing houses  which  are  not  and  cannot  be  safely  pos- 
sessed by  commercial  banks.  Clearing  houses  are 
one  remove  farther  away  from  the  business  com- 
munity with  their  urgent  appeals  than  are  popidar 
banks,  and  their  action  would  therefore  be  more 
conservative  in  this  all-important  matter  of  the 
issue  of  currency.  At  the  same  time  they  are  so 
closely  connected  with  commercial  banks  that  they 


HEARING  BEFORE   THE  COMMITTEE     51 

can  be  appealed  to  and  can  make  instant  response 
in  case  of  need.  By  the  incorporation  of  clear- 
ing houses  under  a  federal  law  with  these  special 
functions,  a  banking  system  is  constituted,  and  it 
is  made  cooperative  instead  of  competitive,  expan- 
sive in  case  of  need,  instead  of  restrictive,  and 
forced  liquidations  and  panic  are  avoided.  The 
clearing  houses  of  the  country  are  thus  brought 
into  the  closest  relations  with  all  commercial 
banks,  those  relations  are  strictly  defined  by  law, 
which  now  they  are  not,  and  this  union  of  higher 
and  lower  brings  all  banking  operations  under  the 
supervision  of  the  government,  constituting  a  true 
national  banking  system. 

The  methods  of  the  system  so  constituted  aU 
conspire  toward  and  result  in  sustaining  and  pro- 
tecting commercial  credit  even  under  the  sever- 
est test.  Proper  names  for  this  system  are  a 
graded  or  cooperative  or  expansive  system,  or  a 
system  of  ample  available  bank  reserves. 

THE  COMPETITIVE  SYSTEM  FOR  PRIVATE  PROFIT, 
THE  COOPERATIVE  FOR  THE  BENEFIT  OF  THE 
PUBLIC 

There  is  another  difference  between  these  two 
systems  more  fundamental  and  important.  It  is 
that  the  ungraded,  competitive,  restrictive,  panic 
system  is  principally  constructed  for  the  private 
pecuniary  benefit  of  the  individual  banks,  while 
the  graded  system,  with  its  cooperation,  expan- 
sion, and  ample  available  reserve,  is  chiefly  for  the 


52  FEDERAL   CLEARING  HOUSES 

benefit  of  the  public.  Webster  said,  ''  Banks  are 
made  for  tbe  borrowers.  They  are  made  for  the 
good  of  the  many  and  not  for  the  good  of  the 
few."  The  trend  of  the  provisions  of  the  un- 
graded system  is  for  the  protection  and  profit  of 
the  individual  bank  even  to  the  extent  of  causing 
for  its  j)rotection  widespread  losses  to  the  commer- 
cial pubhc  by  panic  and  forced  liquidation,  while 
the  provisions  of  a  graded  system  have  as  their 
chief  object  the  protection  and  support  of  the 
business  interests  of  the  pubhc.  These  two  bills 
now  before  this  committee  are,  therefore,  in  their 
ultimate  analysis,  the  one,  H.  R.  9725,  a  bill  for 
private  ends  and  profits,  and  the  other,  H.  R.  9279, 
a  bill  for  the  benefit  of  the  interests  of  the  public. 

TWO    NEW    FEATURES    IN    BILL   9725 

A  clear  understanding  of  this  latter  bill,  H.  R. 
9279,  for  which  this  hearing  is  given,  will  be  pro- 
moted by  incidentally  explaining  and  describing 
the  true  nature  of  the  former. 

It  has  already  been  said  that  an  examination  of 
bill  H.  R.  9725  shows  that  it  does  not  change  the 
banking  principle  contained  in  and  limited  by  the 
present  National  Bank  Act.  The  bill  adds,  how- 
ever, two  features  not  contained  in  that  act,  by 
proposing  the  issue  of  reserve  notes  to  take  up 
government  notes,  and  the  issuing  of  circulating 
notes  ae^ainst  bank  assets  in  the  hands  of  the 
banks. 

These  are  details  which  are  not  distinctive  and 


HEARING  BEFORE   THE  COMMITTEE     53 

which  might  be  added  to  any  other  system  or  to 
this  system  at  any  other  time.  Their  addition 
might  be  approved  by  some  and  disapproved  by 
others,  but  they  are  only  modifications  of  the  pre- 
sent national  banking  system,  and  they  leave  it 
in  its  fundamental  features  just  as  at  present,  a 
series  of  separate  individual  banks  numbered  from 
one  up  to  over  three  thousand,  and  each  bank  is 
like  every  other  in  all  its  powers,  privileges,  and 
functions. 

RESERVE   NOTES 

It  is  hardly  necessary  to  consider  the  feature  of 
the  bill  which  provides  reserve  notes  of  banks  in 
place  of  government  notes,  because  the  fundamen- 
tal principle  of  the  system  is  not  changed  thereby. 
Also  the  obligation  of  the  government  regarding 
the  reserve  notes  is  only  suspended  or  dormant, 
and  on  the  failure  or  liquidation  of  a  national 
bank  it  revives.  The  relief  from  the  burden  of 
redemption  is,  therefore,  only  temporary.  The  ob- 
ligation would  be  certain  to  revive  at  a  time  when 
banks  generally  would  be  in  trouble,  and  then  the 
plague  of  redemption  would  exist  as  before  and 
under  the  most  unpropitious  circumstances. 

The  government  is  too  big  to  hide  behind  the 
banks.  It  must  take  care  of  itseK.  It  has  had 
an  Independent  Treasury  since  1840,  and  no  step 
should  now  be  taken  to  obliterate  the  strong  line 
of  division  between  the  fiscal  operations  of  the 
government  and  the  commercial  business  of  the 
people. 


54  FEDERAL   CLEARING  HOUSES 

tlNSECURED    BANK   NOTES 

Nor  is  it  worth  while  seriously  to  consider  the 
issue  of  circulating  notes  by  three  thousand  sep- 
arate individual  banks  against  securities  in  their 
own  possession,  because  that  also  does  not  change 
the  character  of  the  old  system.  Moreover,  the 
princi23le  of  a  currency,  secured  by  assets  in  the 
hands  of  a  trustee,  has  become  too  thoroughly 
ingrained  in  the  thoughts  of  the  peoj)le  to  admit  of 
being  dislodged  at  the  present  time.  Bank  notes 
on  assets  in  the  hands  of  banks  are  the  most  ex- 
plosive form  in  which  bank  credit  can  be  put,  and 
biUs  issued  by  three  thousand  banks  would  be  cer- 
tain to  produce  and  aggravate  a  panic.  Why  does 
not  the  bill  provide  that  these  notes  shall  be  ac- 
cepted by  all  national  banks  at  par  ?  Is  it  because 
they  are  good  enough  for  the  peojjle  but  not  good 
enough  for  the  banks  ? 

These  two  features  of  reserve  notes  and  unse- 
cured bills  are  joined  together,  and  the  banks  are 
required  by  the  bill  to  incur  the  obligation  of  re- 
deeming the  debt  of  the  government  assumed  b}^ 
them  as  a  compensation  for  the  privilege  of  an 
unsecured  note  issue.  The  inducement  held  out  to 
the  banks  to  do  this  is  the  privilege  of  note  issues 
on  their  own  assets.  This  is  a  great  concession, 
and  a  good  source  of  income  to  banks,  but  a  fruit- 
ful one  in  losses  to  the  pubhc. 


HEARING  BEFORE   THE  COMMITTEE     55 

THE    PUBLIC,    NOT   THE    BANKS,    SUFFER   FROM 
CONTRACTION 

Experience  has  sliown  that  banks  can  exercise 
the  function  of  unsecured  note  issue  and  continue 
to  pay  dividends  even  though  the  public  suffers 
from  the  resulting  panic.  In  1837  the  banks 
continued  to  pay  dividends  wliile  the  country  was 
ruined  by  the  liquidation  caused  by  the  retire- 
ment of  their  note  issues.  Banks  have  a  claim 
equal  to  a  mortgage  on  the  property  of  the  com- 
munity, and  if  a  demand  for  money  occurs,  they 
can  force  liquidations  and  get  back  the  money 
loaned,  though  the  borrower  is  forced  to  the  wall. 
Unsecured  note  issues  contract  with  greater  rapid- 
ity than  any  other  form  of  bank  credit,  and  are 
the  s:reatest  source  of  dans'er  to  the  business  com- 
mmiity,  but  the  banks  themselves  do  not  suffer 
from  the  contraction.  So  the  privilege  of  note 
issue  on  assets  in  their  hands  is  coveted  by  banks, 
and  it  is  used  in  bill  H.  R.  9725  to  induce  them 
to  assume  the  obligations  of  redeeming  govern- 
ment notes,  which,  in  the  report  on  tliis  bill,  is 
acknowledged  to  be  a  heavy  burden. 

Granting  all  that  is  said  in  the  report  of  your 
special  sub-committee  as  to  the  safety  of  unsecured 
notes,  the  chief  argument  against  them  is  left  im- 
answered,  that  they  are  like  scythes  to  mow  down 
the  business  which  the  banks  have  created.  As 
Governor  Marcy  said,  in  his  message  of  January 
3,  1837,  of  an  unsecured  paper  circulation,  this  is 


56  FEDERAL   CLEARING  HOUSES 

an  evil  ''  against  which  it  is  the  duty  of  the  legis- 
lature to  afford  ample  and  certain  protection." 

TKUE   NAME,    "  THE    PANIC    SYSTEM  " 

Bill  H.  R.  9725  is,  therefore,  the  present  com- 
petitive, restrictive,  panic  system  of  banking, 
with  two  additional  features,  —  the  assumption  of 
the  payment  of  government  notes  and  the  issue 
of  notes  on  assets  in  the  hands  of  each  one  of  the 
three  or  four  thousand  banks.  Whether  or  not 
these  two  features  are  a  recommendation  or  a  dis- 
advantage, the  underlying,  fundamental,  control- 
ling characteristic  of  the  banking  system  contained 
in  or  proposed  by  the  bill  H.  R.  9725  is  the  same 
as  contained  in  the  National  Bank  Act ;  that  is, 
one  of  separate,  individual  banks,  no  one  of  which 
is  different  in  any  respect  from  any  other. 

There  is  no  cooperation  between  banks  pro- 
posed in  the  bill,  and  in  case  of  panic  each  of  the 
three  thousand  banks  must  fight  for  its  own  life. 
This  produces  restriction  of  banking  facilities  at 
the  first  sign  of  monetary  disturbance,  nor  is  there 
any  provision  for  the  support  of  commercial  credit 
in  time  of  panic.  The  true  name  for  such  a  sys- 
tem is  the  "  panic  system." 

GOVERN^IENT     FINANCES     SHOULD     BE    INDEPEND- 
ENT 

I  am  not  here  to  criticise  this  bill,  and  I  only 
point  out  its  cliief  characteristics  as  I  understand 
them,  that  this  committee  may  see  clearly  what  is 


HEARING  BEFORE   THE  COMMITTEE     57 

proposed  to  accomplisli  by  bill  H.  R.  9279.  That 
bill,  which  is  the  subject  of  the  present  hearing,  is 
a  banking  and  currency  measure,  and  has  nothing 
to  do  with  the  finances  of  the  government.  These 
two  subjects  should  be  kept  distinct.  The  inde- 
pendence of  the  United  States  Treasury  from  the 
banking  operations  of  the  people  was  established, 
as  I  have  said,  in  1840,  and  the  advantages  re- 
sulting to  the  government  from  this  separation 
have  been  almost  universally  acknowledged.  The 
financial  principle  seems  well  established  that  the 
government  should  take  care  of  its  obligations, 
and  corporations  created  by  the  government  of 
theirs. 

If  the  government  is  in  need  of  revenue  to  de- 
fray its  expenses  in  peace  or  in  war,  it  must  find 
the  ways  and  means  to  raise  a  revenue  sufficient 
to  meet  them.  If  the  demand  notes  of  the  gov- 
ernment are  presented  in  excess  of  the  ability  of 
the  Treasury  to  pay  them  in  coin,  the  government 
must  find  the  ways  and  means  to  replenish  its 
coin  reserve.  If  Congress  should  decide  not  to 
make  such  provision,  the  banks  must  accept  that 
decision,  for  they  are  powerless  to  change  it.  Their 
province  is  to  do  business  in  the  currency  which 
the  government  provides,  not  to  decide  what  that 
currency  shall  be.  The  laws  of  banking  govern 
banking  operations  whether  the  currency  is  silver 
or  gold  or  an  irredeemable  paper  money.  The 
whole  matter  of  the  currency  of  the  government 
is  outside   of  the  banking  questioj3f,  and  the  t#^ 

{(    UNIVERSITY  j 

\.   .    OF  ..,  y 


68  FEDERAL   CLEARING  HOUSES 

should  be  separated  and  taken  up  and  decided 
apart  from  each  other.  The  banking  system 
should  not  be  the  battlefield  for  warring  currency 
factions. 

Banking  and  currency  are  matters  relating  to 
corj^orations  created  by  the  government  and  relat- 
ing to  the  people,  all  of  whom  are  persons  and 
subjects  of  the  government,  and  to  their  commer- 
cial transactions,  so  no  apology  is  needed  for  ask- 
ing the  attention  of  the  Committee  on  Banking 
and  Currency  to  a  bill  which  treats  only  and  ex- 
clusively of  banking  and  currency. 

BENEFITS  OF  A  GOOD  BANK  CURRENCY- 

While  government  and  bank  currency  are  two 
distinct  questions,  it  is  also  true  that  a  good  bank- 
ing currency  will  aid  the  country  in  maintaining  a 
good  government  currency.  If  the  bank  currency 
sustains  and  protects  commercial  credit,  there 
will  be  less  discussion  of  the  money  question. 
A  good  bank  currency  would  give  the  advocates 
of  silver  and  fiat  money  all  they  are  striving  for, 
wliile  they  would  be  grievously  disappointed  with 
the  result  of  free  silver  and  unlimited  government 
currency.  The  inflation  caused  by  free  silver  or 
fiat  money  would  take  place  once,  and  that  would 
be  the  end  of  it.  A  few  would  be  made  rich,  but 
it  would  not  be  the  farmer,  nor  cotton  grower, 
nor  mechanic.  Can  the  people  of  a  mining  State 
be  sure  that  those  who  would  amass  fortunes 
woidd  remain    in  those    States    to    spend  them? 


HEARING  BEFORE   THE  COMMITTEE     59 

Would  they  not  come  East  or  go  to  London  or 
Paris  ? 

But  a  good  banking  system  would  remain  in 
tlie  State  to  perform  its  functions  season  after 
season  and  year  after  year,  conveying  the  lifeblood 
of  commerce  through  the  veins  and  arteries  of  the 
body  commercial  that  are  now  well-nigh  bloodless 
and  paralyzed.  Free  silver  could  not  benefit  a 
mining  State  as  free  banking  facilities  could. 
"  Credit,"  said  Daniel  Webster,  "  has  done  more 
a  thousand  times  to  enrich  nations  than  all  the 
mines  of  all  the  world."  So  a  bill  to  protect 
credit  will  do  more  to  enrich  the  United  States 
than  its  mines  can  ever  do. 

NATIONAL    BANK     ACT     SHOULD     STAND   WITHOUT 
A3IEXDMENT 

Bill  H.  R.  9279  does  not  disturb  or  conflict 
with  the  National  Bank  Act.  It  is  supplementary 
to  it.  Popidar  banks  are  provided  for  in  the 
National  Bank  Act,  and  the  measure  now  under 
consideration  proposes  that  that  act  shall  stand 
without  amendment.  The  National  Bank  Act  is 
admirable  in  all  its  provisions ;  it  is  the  flower 
and  fruit  of  republican  banking  legislation  ;  it  has 
served  the  people  well  these  thirty-five  years,  it 
has  their  confidence,  and  is  enshrined  in  their 
affections.  A  change  in  that  act  would  be  most 
risky  and  most  serious.  Moreover,  no  changes 
are  required  in  it,  for  it  is  difficult  to  see  how  a 
general  law  could  be   made  more  perfect.      Also 


60  FEDERAL   CLEARING  HOUSES 

hundreds,  and  perhaps  thousands,  of  legal  deci- 
sions have  been  rendered  by  the  courts  defining 
the  meaning  of  its  various  sections,  successive 
Congresses  have  revised  and  amended  it,  and  di- 
gests have  been  made  of  these  decisions  and 
amendments  until  a  code  of  banking:  law  has 
grown  up  in  these  thirty-five  years  around  the 
National  Bank  Act  which  is  one  of  the  most  valu- 
able products  of  our  national  legislation.  To  lose 
all  this,  to  sweep  it  away  with  a  new  national 
bank  act,  would  inflict  such  a  loss  on  our  people 
that  it  should  not  be  thought  of  except  under  the 
direst  necessity.  No  such  necessity  exists.  What 
is  needed  is  to  complete  the  national  banking  sys- 
tem, not  to  change  it.  BiU  H.  R.  9279  proposes 
to  do  that  by  incorporating  our  clearing  houses 
under  a  federal  law,  thus  bringing  all  banking 
operations  under  federal  supervision  and  control. 

COMPLETION    OF   NATIONAL    BANKING   SYSTEM 

The  conception  of  the  framers  of  the  National 
Bank  Act  is  thus  fulfilled  by  taking  the  last  step 
necessary  to  bring  all  the  banking  operations  of 
the  country  into  the  one  system.  When  clearing 
houses  are  thus  incorporated  under  a  federal  law, 
it  will  be  safe  to  give  to  them  special  functions 
which  cannot  be  conferred  safely  on  popidar  banks, 
chief  among  which  is  the  power  to  act  as  trustees 
for  the  public  by  holding  in  trust  securities  pledged 
by  popular  banks  against  which  circulating  notes 
may  be   issued  at  seventy-five  per  cent,  of  their 


HEARING  BEFORE   THE  COMMITTEE     61 

ascertained  value,  good  and  receivable  at  any  clear- 
ing house  in  the  nation. 

This  function  can  be  safely  given  to  at  least  one 
clearing  house  in  each  State,  so  as  to  secure  a  local 
issue  of  currency,  and  the  exercise  of  this  function 
will  remedy  the  only  defect  in  our  bankuig  system, 
which  is  the  absence  of  the  power  of  self-preserva- 
tion and  of  the  protection  of  commercial  credit. 
This  change  would  make  it  impregnable,  and,  like 
our  judicial  system,  the  foremost  among  the  bank- 
ing systems  of  all  the  nations  of  the  earth. 

THE   PROTECTION    AND    SUPPORT   OF    COMMERCIAL 
CREDIT 

If  it  is  asked  what  is  the  reason  for  this  addi- 
tion to  our  banking  laws,  the  answer  is,  because 
there  is  no  provision  in  the  National  Bank  Act 
for  the  support  of  commercial  credit,  and  none  is 
proposed  in  bill  H.  R.  9725  ;  and  for  lack  of  such 
support  we  have  seen  of  late  years  successive  pan- 
ics march  over  our  land,  destroying  and  prostrating 
business  ahnost  to  the  point  of  the  exhaustion  of 
the  country.  Every  emergency  or  disaster,  or  war 
or  rumor  of  war,  reveals  the  weakness  of  our  sys- 
tem, which  trembles  at  the  first  approach  of  dan- 
ger, because  it  is  conscious  of  its  lack  of  protec- 
tion. 

The  great  business  need  of  our  country  to-day 
is  the  assurance  of  the  protection  of  commercial 
credit. 


62  FEDERAL   CLEARING  HOUSES 

COMMERCIAL    CREDIT   DEFINED 

The  bill  which  is  the  subject  of  this  hearing  has 
for  its  chief  object  to  support  commercial  credit. 
By  commercial  credit  is  meant  the  solvency  of  sol- 
vent individuals,  firms,  and  corporations  engaged  in 
conmierce  and  finance.  To  support  the  credit  of 
solvent  parties  is  to  provide  means  and  measures 
to  insure  their  solvency.  Solvency  is  that  state  of 
a  sound  concern,  be  it  corporation,  firm,  or  indi- 
vidual, in  v^^hich  it  is  able  to  provide  the  money 
necessary  to  carry  on  its  business  and  meet  its 
obligations  out  of  its  cash  on  hand,  or  upon  sales 
of  its  notes  or  property,  or  by  loans  thereon. 

Insolvency  may  overtake  a  concern  by  reason  of 
losses  and  misfortunes,  or  insolvency  may  occur 
when  the  concern  has  met  no  losses  and  has  ample 
bank  balances  to  its  credit  and  its  hands  full  of 
good  assets,  but  owing  to  a  monetary  disturbance 
it  cannot  draw  money  from  the  bank  or  find  pur- 
chasers for  its  property,  however  low  the  price 
may  be  fijj:ed,  or  obtain  loans  on  its  notes,  however 
well  secured  by  valuable  assets.  The  support  of 
commercial  credit,  which  this  bill  contemplates,  is 
that  of  solvent  concerns  who  can  make  good  and 
valid  obligations,  and  who  can  offer  abundant 
assets  as  security  for  loans,  and  of  whose  credit 
and  ultimate  solvency  there  can  be  no  question. 

It  might  appear  that  strong  parties,  individuals, 
firms,  and  corporations  of  the  kind  described  are 
not  in  need  of  protection,  but  are  amply  able  to 


HEARING  BEFORE   THE  COMMITTEE     63 

take  care  of  themselves,  and  it  therefore  becomes 
necessary  to  show  that  our  present  banking  system 
does  not  contain  provisions  to  afford  this  class  sure 
protection  to  their  solvency,  nor  does  bill  H.  R. 
9725  contain  such. 

CREDIT    MAINTAINED    BY    CASH    RESERVES 

It  is  first  necessary  to  mention  the  fact  that  all 
business  is  done  on  the  credit  system  ;  that  every 
concern  or  individual  having  a  surplus  of  unem- 
ployed cash  will  seek  immediately  to  invest  in 
some  productive  employment  as  much  of  its  idle 
cash  as  may  not  be  needed,  retaining  only  so  much 
thereof  as  may  be  required  to  meet  demand  calls. 
This  is  the  universal  practice  in  all  business, 
whether  commerce,  manufacture,  agriculture,  min- 
ing, banking,  or  any  other  employment.  Each 
department  of  business  has  its  rule  as  to  the  safe 
amount  which  can  be  invested  in  a  permanent  way 
and  what  percentage  of  cash  may  be  required  to 
insure  ability  to  meet  all  demands  for  cash.  This 
percentage  of  idle  or  uninvested  money  each  concern 
calls  its  reserve.  The  continual  question  among 
all  corporations  and  business  men  is  as  to  the 
amount  of  cash  which  should  be  kept  on  hand  to 
insure  solvency.  On  the  one  hand,  there  is  the 
necessity  of  solvency,  and  on  the  other  the  desire  to 
keep  all  capital  employed,  and  there  is  a  continual 
strife  between  the  two.  The  difficulty  in  ariving 
at  the  correct  ratio  is  so  great  that  it  has  been 
found  necessary  to  regulate  by  statute  the  percen- 


64  FEDERAL   CLEARING  HOUSES 

tages  of  reserves  wliicli  shall  be  carried  by  banks 
and  insurance  companies. 

THE    CREDIT    SYSTEM   UNIVERSAL 

This  survey  shows  that  the  whole  business  com- 
munity is  conducting  its  business  of  every  shape 
and  description  on  the  credit  principle.  The  basis 
of  the  idea  of  credit  is  that  the  business  world  has 
confidence  that  a  firm  or  corporation  can  conduct 
its  business  safely  with  a  cash  reserve  and  that 
markets  and  banks  will  be  open  for  sales  and  loans 
to  provide  all  its  possible  needs. 

There  is  a  mutual  dependence  of  all  departments 
of  business  each  upon  the  other,  and  if  this  co- 
operation does  not  exist  solvency  cannot  be  main- 
tained. Reserves  must  be  kept  up  and  be  avail- 
able, or  solvency  is  destroyed.  Markets  must  be 
open,  or  business  comes  to  an  end.  Banks  must 
be  able  to  discharge  all  their  functions,  or  business 
must  be  suspended  and  markets  must  be  closed. 

All  business  being  thus  mutually  dependent  and 
transacted  on  the  principles  of  the  credit  system, 
it  follows  that  each  one  and  all  of  the  1,080,000 
firms,  corporations,  and  individuals  engaged  in 
business  in  the  United  States,  according  to  mer- 
cantile reports,  are  doing  business  on  credit,  all 
have  a  cash  reserve,  greater  or  smaller,  and  all 
have  assets,  which  in  case  of  need  they  would 
turn  into  cash,  either  by  sale  or  direct  pledge  or 
by  making  paper  against  them  if  their  standing 
and  responsibility  would  enable  them  to  do  so. 


HEARING  BEFORE   THE  COMMITTEE     65 

It  can  be  safely  said  tliat  tliere  are  no  firms, 
individuals,  or  corporations  doing  business  in  the 
United  States  on  a  strictly  cash  basis  ;  that  is,  no 
firms  have  all  their  cash  in  coin  in  their  own  cus- 
tody and  pay  coin  for  aU  purchases  and  sell  only 
for  coin  on  delivery.  A  firm  doing  business  in 
that  manner  would  soon  find  itself  distanced  by 
competition  and  unable  to  make  money. 

CREDIT   SYSTEM   MUST    BE   PROTECTED 

The  basis  of  all  business  in  the  United  States 
being  the  credit  system,  every  business  man  is 
vitally  interested  in  having  the  credit  system  work 
smoothly.  He  fii'st  wants  to  be  absolutely  sure 
that  his  reserve,  which  he  calls  his  cash  on  hand, 
is  at  all  times  subject  to  his  demand.  This  means 
that  the  banks  which  are  the  custodians  of  his  cash 
shall  be  at  all  times  ready  to  respond  to  his  calls, 
even  if  he  should  ask  for  the  payment  of  all  that 
is  due  him. 

He  wants,  secondly,  that  in  case  of  need  he 
shall  be  able  to  increase  his  cash  means  by  pledge 
of  either  his  credit  or  his  assets  for  a  temporary 
loan  if  the  cash  reserve  he  has  provided  has  been 
diminished  or  exhausted,  and,  tliirdly,  he  wants 
the  markets  open  so  that  he  may  sell  his  property 
without  sacrifice  on  the  basis  of  a  fair  return  to 
himself  and  a  fair  equivalent  to  a  buyer. 


66  FEDERAL   CLEARING  HOUSES 

ALL   THE   NATION    INTERESTED 

This  describes  the  condition  and  business  wants 
of  the  1,080,000  individuals,  firms,  and  corpora- 
tions doing  business  in  the  United  States.  Of 
these  there  are  about  10,000  banks  and  1,070,000 
other  concerns  and  individuals. 

These  1,070,000  individuals,  firms,  and  corpora- 
tions represent  those  who  are  the  owners  of  the 
manufactories,  trading  companies,  and  firms  of  the 
manifold  descriptions  which  go  to  make  up  the 
various  occupations  of  the  people  of  the  United 
States.  They  are  the  ones  who  give  emplopnent 
to  the  2,500,000  employees  engaged  in  railroad 
and  other  transportation  ;  they  pay  the  wages  of 
the  5,000,000  operators  in  our  factories  of  all 
kinds ;  they  hire  the  4,200,000  women  and  men 
who  are  engaged  in  domestic  and  personal  service ; 
they  ultimately  pay  the  salaries  of  the  1,000,000 
men  and  women  engaged  in  professional  work. 
They  are  the  busy,  thinking,  energetic,  active, 
pushing  men  who  are  doing  the  manufacturing, 
merchandising,  and  trading  of  our  country,  and 
the  welfare  of  their  employees  and  dependents, 
and  thus  of  the  whole  country,  rests  on  the  orderly 
working  of  the  credit  system.  If  a  panic  comes 
to  upset  that  system,  then  distress  is  felt  not  only 
by  the  1,070,000  individuals,  firms,  and  corpora- 
tions engaged  in  business,  but  by  all  their  depend- 
ents ;  and  the  legislators  who  can  devise  and  enact 
a  law  which  will  support   the  credit   system  will 


HEARING  BEFORE   THE  COMMITTEE     67 

confer  a  benefit  on  every  man,  woman,  and  child 
throughout  the  nation. 

This  view  of  reserves  is  from  the  standpoint  of 
the  1,070,000  concerns  who  make  up  the  business 
community.  We  sometimes  limit  reserves  to  the 
idle  cash  held  by  banks,  but  in  a  true  sense  every 
business  concern  has  its  separate  reserve,  and  it  is 
represented  by  its  bank  balance  or  quick  securi- 
ties. Bank  balances  should  be  regarded  as  the 
reserves  of  the  country. 

PRESENT    BANKING    SYSTEM    PRECARIOUS 

We  can  now  see  how  precarious  is  the  monetary 
situation  in  the  United  States  if  the  country  banks, 
as  they  are  permitted  to  do  under  the  National 
Bank  Act,  immediately  lend  out  from  75  to  85  per 
cent,  of  these  reserves  and  then  send  one  half  or 
two  thirds  of  the  remaining  cash  to  reserve  agents, 
who  in  turn  loan  out  75  per  cent,  of  the  cash  re- 
serve sent  to  them  and  hold  the  balance,  not  as  a 
special  fund  for  the  benefit  of  the  banks  whose  re- 
serve it  is,  but  merge  it  into  their  common  reserve 
on  all  their  general  deposits,  and  at  the  same  time 
have  no  way  of  repaying  the  reserves  thus  confided 
to  them  if  an  emergency  arises,  except  by  forcing 
liquidations  on  the  borrowing  pubhc.  The  banks 
hold  the  reserves  of  the  public  ostensibly  on  de- 
mand and  then  put  80  per  cent,  thereof  beyond 
their  call.  This  practice  is  a  distinct  weakening 
of  the  banking  situation  if  there  is  no  way  by  which 
the  banks  can  get  back  this  money  except  by  dis- 
tressing borrowers. 


68  FEDERAL   CLEARING  HOUSES 

Suppose  it  should  happen  that  all  the  deposit 
reserves  should  be  called  for  by  out-of-town  banks, 
then  a  simple  calculation  shows  that  the  banks  in 
reserve  cities  would  be  left  with  hardly  more  than 
^\Q  per  cent,  in  cash  on  their  remaining  deposits, 
which  would  then  amount  to  about  fT 5 0,0 00,0 00. 

This  state  of  affairs  would  be  very  alarming  in 
any  less  intelligent  country  than  the  United  States, 
and  it  exposes  even  us  to  a  constantly  recurring 
liability  to  spasms  of  apprehension  and  panic,  dur- 
ing which  the  three  objects  desired  by  the  business 
community  and  necessary  for  the  support  of  the 
credit  system  are  imperiled,  viz.,  the  payment  of 
bank  balances  in  cash,  the  granting  of  needed 
loans  to  the  business  community,  and  the  keeping 
of  markets  open. 

PROTECTION     TO     CREDIT     BY     A     SOUND     CREDIT 
CURRENCY 

The  simple  expedient  necessary  to  prevent  this 
liability  to  apprehension  is  to  enact  laws  to  pro- 
tect reserves,  not  only  the  reserves  of  the  banks, 
but  the  reserves  of  the  business  community  repre- 
sented by  bank  deposits,  and  to  give  banks  the 
power  to  grant  accommodations  as  needed. 

The  power  to  issue  a  credit  currency  will  do 
this,  provided  it  is,  as  Professor  Sumner  expresses 
it,  "  of  a  credit  wliich  cannot  fail  in  the  wildest 
panic." 

A  credit  currency  issued  by  three  thousand  local 
banks  on  assets  in  their  own  hands,  as  proposed  in 


HEARING  BEFORE   THE  COMMITTEE     69 

bill  H.  K.  9725,  would  not  answer.  In  a  wild 
panic  that  would  fail.  It  must  have  a  credit  sec- 
ond only  to  the  government,  which  will  enable  it  to 
circulate  freely  from  one  end  of  the  country  to  the 
other,  because  it  is  to  do  the  service  of  maintain- 
ing the  reserves  of  all  the  1,070,000  individuals, 
firms,  and  corporations  who  are  bearing  the  busi- 
ness burdens  of  the  entire  country  and  are  pay- 
ing the  salaries  and  wages  of  the  15,000,000  to 
17,000,000  workers,  men  and  women,  engaged  in 
honest  labor.  It  must  be  a  currency  which  will 
go  at  par  from  Mame  to  Texas  and  up  to  the  far- 
thest point  of  Alaska.  It  must  be  able  to  sup- 
port the  credit  of  a  solvent  firm  or  corporation  in 
Massachusetts  by  paying  a  debt  due  in  Iowa,  or 
vice  versa.  The  transactions  under  the  credit 
system  are  so  interlaced  and  interwoven  all  over 
the  country  that  that  system  cannot  be  supported 
except  by  a  currency  of  universal  credit.  The 
clause  in  the  charter  of  the  Bank  of  France  states 
it  plainly  thus  :  "  The  essential  interests  of  the 
country  imperiously  demand  that  every  bank  biU 
declared  to  be  lawful  money  shall  be  able  to  circu- 
late equally  in  all  parts  of  the  land." 

EFFECTS    OF   APPREHENSION 

Whenever  a  spasm  of  apprehension  comes,  which 
of  late  years  has  been  almost  a  chronic  condition, 
the  banks  stop  lending  or  discounting  and  thus 
stop  much  productive  business.  That  is  the  first 
effect.      By  it   the   availability  of   the    collateral 


70  FEDERAL   CLEARING  HOUSES 

security  reserves  of  business  houses  in  the  shape 
of  bonds  and  dividend-paying  stocks  is  cut  off,  and 
they  must  depend  on  their  cash  or  bank  deposit 
reserves  only.  If  the  apprehension  dee^^ens,  even 
the  use  of  this  cash  reserve  is  diminished ;  and  a 
next  step  is  taken  when  the  banks  find  it  necessary 
to  strengthen  their  own  cash  reserve  by  absorbing 
cash  from  the  general  public.  The  movement  is 
a  progressive  one,  and  the  tightening  goes  on  until 
enough  of  the  life  blood  of  commerce  is  squeezed 
out  of  the  general  public  to  restore  reserves  and 
to  relieve  the  banks  of  the  danger  caused  by  the 
paucity  of  their  cash  on  hand. 

The  diminution  of  the  reserves  of  business 
houses  must  take  place  at  the  same  time  with  a 
diminution  of  bank  reserves  —  that  is,  loans  are 
wanted  when  banks  are  least  able  to  respond.  The 
demand  always  comes  when  the  supply  is  lowest. 
The  mode  by  which  this  dilemma  may  be  avoided 
is  by  the  creation  of  money  to  serve  for  the  tem- 
porary emergency. 

The  bank  has  no  money  to  lend,  its  cash  being 
reduced  to  the  lowest  percentage  of  required  re- 
serves ;  but  the  borrower  has  good  security  and 
needs  money. 

RELIEF        THROUGH       INCORPORATED       CLEARING 
HOUSES 

It  is  in  this  juncture  that  the  measure  proposed 
in  bill  9279  would  bring  relief.  Under  the  re- 
strictive system   the  borrower  would  have   to  go 


HEARING  BEFORE   THE  COMMITTEE     71 

without,  and  he  would  sacrifice  just  so  much  of  his 
property  as  was  necessary  to  maintain  his  solvency. 
In  an  active  business  this  frequently  causes  a  fuial 
liquidation,  which  is  commercial  death.  But  with 
a  system  of  incorporated  clearing  houses,  such  as 
is  proposed  in  bill  9279,  such  a  contingency  could 
not  occur.  Banks  coidd  always  get  advances  to 
enable  them  to  pay  depositors  and  to  lend  cus- 
tomers all  the  money  needed  for  legitimate  pur- 
poses. 

Clearing  houses  incorporated  under  a  federal 
law,  as  proposed  in  this  bill,  would  be  authorized 
to  receive  bank  assets  from  their  bank  members, 
and  advance  seventy-five  per  cent  of  their  estimated 
value  in  notes  created  for  the  purpose,  whose 
credit  could  not  be  questioned  from  Maine  to 
Alaska,  because  the  notes  are  receivable  at  any 
clearing  house  in  the  land,  and  there  is  a  trustee 
to  act  for  the  note  holder  who  has  in  his  possession 
ample  collateral  security,  and  whose  faithfulness 
to  his  trust  cannot  be  questioned.  That  trustee 
is  the  clearing  house.  This  is  not  an  inflation, 
or  the  creation  of  capital,  for  that  existed  before  in 
the  security,  but  it  is  a  change  of  its  form  into  a 
circulating  medium,  on  the  assumption  that  when 
the  round  is  performed  by  the  circulating  notes  the 
borrower  wiU  have  disposed  of  enough  property  in 
the  ordinary  course  of  his  business  to  secure  the 
cash  needed  to  retire  the  notes.  This  is  a  most 
beneficent  operation  from  every  point  of  view,  as 
it  benefits  every  one  concerned  therein  and  is  done 


72  FEDERAL   CLEARING  HOUSES 

with  entire  safety  to  all.  The  proof  of  its  good- 
ness is  that  it  may  be  done  to  any  extent  wliich 
legitimate  business  demands. 

IDEA    SUGGESTED     BY     CLEARING-HOUSE    CERTIFI- 
CATES 

The  idea  of  this  form  of  currency  was  suggested 
by  clearing-house  certificates,  with  which  the  public 
has  become  familiar  in  recent  years.  The  methods 
which  have  been  so  successful  in  producing  abso- 
lute safety  in  these  certificates  have  been  applied 
to  the  proposed  currency.  The  object  aimed  at 
was  to  produce  as  strong  a  currency  as  the  banks 
could  make,  so  that  it  could  not  fail  to  be  good  in 
any  panic. 

If  the  unsecured  notes  of  three  thousand  banks 
are  good,  as  said  in  the  report  of  your  sub-com- 
mittee, these  secured  notes  of  forty-five  state  clear- 
ing houses  woidd  be  inuneasurably  better. 

DIFFERENCE       BETWEEN       CLEARING-HOUSE       CUR- 
RENCY   AND    CERTIFICATES 

The  great  difference  between  clearing-house  cur- 
rency and  clearing-house  certificates  is  that  in  one 
case  the  currency  is  paid  out  and  the  reserves  are 
kept  intact,  while  in  the  other  the  precious  re- 
serves are  paid  out  and  the  certificates  held  in 
their  place.  This  latter  act  is  an  infraction  of 
the  law  as  to  reserves  which  the  country  winks  at. 
Clearing-house  certificates  cannot  be  used  to  any 
extent  outside  of  the  great  centres,  and  they  are  a 


HEARING  BEFORE   THE  COMMITTEE     73 

dangerous  resource  at  all  times,  while  clearing- 
house currency  could  be  used  everywhere  and  at 
aU  times  with  safety. 

Clearing-house  currency  is  therefore  a  source  of 
strength  to  banks,  while  clearing-house  certificates 
are  an  evidence  of  weakness. 

Another  difference  is  that  clearing-house  cur- 
rency would  forestall  and  prevent  a  panic,  while 
certificates  are  issued  after  a  panic  has  taken  place. 
One  is  preventive,  the  other  is  remedial.  The  old 
saying  is  very  true  that  an  ounce  of  prevention  is 
worth  a  pound  of  cure. 

Clearing-house  currency,  therefore,  is  not  an  ex- 
periment, for  the  limited  and  extra-legal  form  of 
clearing-house  certificates  has  many  times  brought 
safe  and  certain  rehef  to  banks  in  reserve  cities. 
Should  not  that  be  legalized  which  has  been  well 
done  extra-legaUy,  and  should  not  the  benefit  of 
the  relief  be  given  to  all  the  country  which  has 
hitherto  been  enjoyed  by  only  a  part  ? 

WITHDKAWAL     OF     BANKING     FACILITIES     CAUSES 
PANIC 

Times  of  apprehension  such  as  we  have  just  been 
considering  come  when  any  great  emergency  pre- 
sents itself.  If  borrowers  can  get  all  the  money 
they  want,  there  is  no  panic,  but  our  banking  re- 
serves under  the  National  Bank  Act  are  so  small 
that  a  general  loss  of  five  per  cent  of  deposits  pre- 
cipitates a  panic.  This  has  brought  our  banking 
system  into  what  may  properly  be  called  a  chronic 
panic. 


74  FEDERAL   CLEARING  HOUSES 

During  the  past  fourteen  years  we  have  had  a 
succession  of  panics,  each  one  caused  by  a  special 
difficulty,  but  they  all  have  their  explanation  in 
the  one  fact  that  our  banking  system  has  no  pro- 
vision within  itself  for  self -protection.  In  1884 
the  failure  of  the  Metropolitan  Bank  was  said  to 
have  caused  a  panic.  Not  so.  The  panic  was 
caused  by  the  fact  that  banks  under  our  system 
could  only  protect  themselves  at  the  expense  of 
the  pubhc.  The  withdrawing  of  banking  facilities 
when  most  needed  was  the  cause  of  the  panic. 
That  was  true  also  in  1893,  when  the  silver  scare 
took  place,  as  is  so  strongly  and  truly  stated  in 
Mr.  Parsons' s  letter,  and  in  1895,  when  the  Vene- 
zuela message  was  issued.  These  were  occasions 
which  revealed  the  weakness  of  our  system.  The 
irritating  causes  come  in  many  different  ways,  but 
the  defact  in  the  system  is  always  the  same. 

What  will  be  the  effect  of  a  declaration  of  war 
with  Spain  ?  We  cannot  tell,  but  this  we  know,  that 
under  our  system  a  general  withdrawal  for  hoard- 
ing purposes  of  five  per  cent  of  banking  deposits 
all  over  the  country  would  leave  the  banks  unable 
to  discount  or  to  sustain  credit,  or  to  prevent  a 
panic.  We  are  under  the  shadow  of  that  danger 
all  the  time. 

THE   REMEDY   IS    SIMPLE 

We  can  talk  about  it  freely  because  the  remedy 
is  so  simple.  All  that  is  needed  is  to  incorporate 
our  clearing  houses  under  a  federal  law,  and  give 


HEARING  BEFORE  THE  COMMITTEE     75 

to  at  least  one  in  each  State  tlie  power  to  receive 
from  its  bank  members  bank  assets,  and  issue 
thereon  at  seventy-five  j)er  cent  of  their  ascertained 
vahie  circulating  notes,  good  at  any  clearing  house 
in  the  land.  Then  all  danger  of  panic  is  removed. 
France  with  her  38,500,000  inhabitants  has  a 
reserve  in  the  Bank  of  France  of  1600,000,000, 
in  addition  to  reserves  held  by  other  French  banks. 
Germany  has  given  to  a  few  of  her  banks  a  re- 
serve power  to  issue  currency  without  hmit,  which 
is  practically  a  reserve  of  one  hundred  per  cent 
of  bankino-  oblioations.  These  enormous  reserves 
preserve  those  countries  free  from  panic.  We  are 
on  the  verge  of  war  with  Spain,  and  our  national 
banks  hold  less  than  twenty  per  cent  of  their  obH- 
gations  in  la^vful  money,  and  the  percentage  of  aU 
banks,  national,  state  and  private,  is  still  less. 

AMPLE  AVAILABLE  RESERVE  REQUIRED 

This  is  totally  inadequate  to  protect  and  support 
commercial  and  banking  credit  in  the  United 
States,  as  we  know  by  our  numerous  panics  in  late 
years.  An  ample  available  reserve  in  the  form  of 
a  legal  power  to  issue  a  bank  currency  of  un- 
doubted credit,  secured  by  collateral  in  the  hands 
of  trustees,  to  the  par  of  the  capital  of  the  com- 
mercial banks  of  the  country,  which  would  be  from 
1600,000,000  to  11,000,000,000,  is  needed  to  place 
our  banking  system  on  a  sure  foundation. 

This  is  the  one  war  measure  which  transcends 
in  importance  all  other  preparations  for  the  na- 


76  FEDERAL   CLEARING  HOUSES 

tional  defense,  because  it  protects  and  sustains 
commercial  and  banking  credit  and  with  it  the 
welfare  of  every  man,  woman,  and  child  in  our 
country. 

TWO    BANKING    SYSTEMS 

You  have  before  you  the  two  banking  systems. 
One  is  the  competitive,  restrictive,  liquidating, 
panic-producing  system,  which  has  resulted  year 
after  year  in  spasms  of  apprehension  which  too 
often  have  produced  commercial  death  to  our  busi- 
ness men.  The  other  is  the  cooperative,  protec- 
tive, sustaining  system  of  an  ample,  available 
banking  reserve,  which  produces  stability  and  will 
protect  us  from  panics. 

The  banking  system  of  France  was  adopted  in 
the  stress  of  the  revolution  of  1848,  and  for  fifty 
years  it  has  maintamed  an  unbroken  record  for 
solvency  and  strength.  It  was  a  war  measure, 
and  strength  to  resist  assaults  upon  credit  was  the 
chief  object.  An  emergency  is  needed  to  show  us 
in  the  United  States  what  is  required  to  make  our 
banking  system  equally  strong  with  that  of  France. 
An  earthen  embankment  is  the  simplest  thing  in 
nature,  but  it  makes  a  fortress  which  no  cannonad- 
ing can  throw  down.  So  an  ample,  available  re- 
serve is  the  simplest  thing  in  banking  and  the 
easiest  to  construct  by  law,  but  it  gives  to  a  bank- 
ing system  a  sohdity  and  stability  which  no  panic 
can  overthrow. 


HEARING  BEFORE   THE  COMMITTEE     11 
TWO    BANKING   BILLS 

Gentlemen,  you  have  before  you  two  bills,  re- 
presenting the  two  systems  of  banking.  Will  you 
advocate  that  which  is  chiefly  for  the  benefit  of  the 
banks,  or  that  which  will  benefit  all  the  people  of 
our  land?  Will  you  join  the  theorists  who  have 
an  untried  scheme  they  wish  to  experiment  with, 
or  will  you  act  as  patriots,  and  in  the  light  of  ex- 
perience advocate  a  law  which  shall  protect  the 
commercial  and  banking  credit  of  the  United 
States  against  internal  dangers,  and  so  make  the 
nation  able  to  meet  and  ov^ercome  all  foreign  foes  ? 

During  the  reading  of  the  foregoing  paper,  the 
following  took  place  :  — 

Mr.  Cox.  When  you  speak  of  1,070,000  peo- 
ple engaged  in  business,  do  you  include  the  farm- 
ers of  the  country  ? 

Mr.  GiLMAN.     No,  sir. 

The  Chairman.  You  spoke  of  different  panics. 
Cannot  you  give  us  the  dates  of  those  different 
panics  ? 

Mr.  GiLMAN.     Yes,  sir. 

Mr.  Fowler.  In  regard  to  the  Metropolitan 
Bank,  is  it  not  a  fact  that  they  had  the  arrange- 
ments all  made  for  carrying  over  that  bank  by 
taking  its  assets,  and  that  there  was  only  one  man 
that  prevented  it  ?  In  your  judgment,  if  that  had 
been  done,  would  we  have  had  that  panic  ? 

Mr.  GiLMAN.  I  would  have  to  refresh  my  mem- 
ory— 


78  FEDERAL   CLEARING  HOUSES 

Mr.  Fowler.  That  is  the  fact,  Mr.  Gilman,  that 
one  man  prevented  their  taking  — 

The  Chairman.    Who  was  the  man  ? 

Mr.  Gilman.  I  think  the  panic  was  on  us  at 
that  time.  It  was  caused  by  the  operations  of  the 
bank  as  well  as  by  its  failure. 

Mr.  Fowler.  These  men  were  together,  and 
one  of  the  men  refused  to  take  these  assets ;  they 
had  to  carry  the  bank  through.  Now,  if  tliey  had 
done  that  —  I  have  been  told  that  by  one  of  the 
men  that  was  on  the  committee  —  do  you  think  we 
would  have  had  that  panic  ? 

Mr.  Oilman.  The  occasion  would  have  been  re- 
moved. 

Mr.  Fowler.  Your  statement  in  that  respect, 
in  view  of  the  facts  in  the  case,  would  hardly  be 
correct,  would  it  ? 

Mr.  Gilman.  I  think  it  corresj)onds  exactly 
with  my  statement.  The  difficulty  was  in  the 
banking  system  and  not  in  the  occasion.  Every 
time  a  panic  takes  place  it  is  a  revelation  of  the 
defect  in  the  system,  and  that  may  arise  from  a 
number  of  causes. 

Mr.  Fowler.  This  was  a  revelation  of  the  specu- 
lation of  the  president,  that  caused  the  withdrawal 
of  banking  facilities. 

The  Chairman.  Do  you  mean  to  say  the  bank- 
ing conditions  are  a  fruitful  source,  or  rather  the 
soil  in  which  that  seed  was  planted? 

Mr.  Gilman.  Yes,  sir ;  that  is  what  I  have 
said.  That  was  true  also  in  1893,  when  the  silver 
scare  took  place. 


HEARING  BEFORE  THE  COMMITTEE     79 

(Mr.  Gilman  completed  the  reading  of  his 
paper.) 

The  Chairman.  There  are  a  few  questions  that 
I  would  like  to  ask.  How  would  you  constitute 
the  capital  of  this  clearing  house  ? 

Mr.  Gilman.  The  clearing  houses  do  not  re- 
quire any  capital.  They  have  a  financial  respon- 
sibility equal  to  all  the  capital  and  surplus  of  all 
their  members. 

The  Chairman.  They  would  be  made  up  of  the 
banks  —  the  banking  ? 

Mr.  Spalding.    No,  the  assets. 

The  Chairman  (continuing).  Would  consti- 
tute the  capital,  and  then  you  would  allow  them 
to  use  currency  instead  of  the  bank.  Then  cur- 
rency would  freely  issue  and  they  would  loan  this 
currency  to  the  banks  or  simply  furnish  it  to 
them? 

Mr.  Gilman.  Each  clearing  house  would  have 
the  power  under  this  bill  to  fix  the  rates  of  interest 
which  the  borrowing  bank  should  pay.  The  profit 
on  the  loans  would  be  for  the  benefit  of  all  the 
members  of  the  clearing  house. 

The  Chairman.  After  one  or  two  questions,  I 
suppose  Mr.  McCleary  would  have  the  right  to 
ask  questions,  and  I  will  yield  the  floor  to  him 
now. 

Mr.  Hill.  I  would  like  to  ask  a  question  as 
to  the  understanding  of  a  single  point.  Do  you 
propose  to  substitute  clearing-house  currency  for 
further  issues  of  bank  currency  in  case  of  neces- 
sity? 


80     FEDERAL   CLEARING  HOUSES 

Mr.  GiLMAN.    In  case  of  necessity. 

Mr.  Hill.  What  provision  do  you  make  for 
the  redemption  of  your  clearing-house  currency? 
It  is  a  demand  note  issued  in  small  amounts  or 
large  amounts  as  the  clearing  house  sees  fit.  In 
other  words,  it  is  a  direct  substitute  with  all  the 
qualifications  and  all  the  provisions  that  the  bank 
note  has  ? 

Mr.  GiLMAN.    Yes. 

Mr.  Hill.  What  provision  do  you  propose  to 
substitute  for  redemption  — 

Mr.  GiLMAN.  The  redemption  is  made  by  the 
bank  as  it  would  pay  a  check.  It  is  not  a  substi- 
tute for  redemption,  it  is  the  most  direct  and  sum- 
mary form  of  redemption. 

Mr.  Hill.  I  understand  it  is  now  payable 
back  to  the  bank  which  issues  it,  and  it  returns  it 
with  the  certificate  issued  to  it.  On  the  other 
hand,  the  bank  could  not  present  it  to  the  clearing 
house  of  issue  and  have  it  paid.  It  must  come 
back  through  the  source  in  which  it  went  out. 
You  pro]x>se  to  issue  it  to  a  third  party  and  they 
can  present  it  direct  for  payment  ? 

Mr.  GiLMAN.    Yes. 

Mr.  Hill.  Now,  what  provision  is  made  for  the 
general  clearing  houses  redeeming  them  ?  They 
have  no  cash  on  hand  and  never  have  had. 

Mr.  GiLMAN.  A  clearing  house  is  a  place  where 
the  solvency  of  banks,  corporations,  fimis,  and 
individuals  is  brought  to  a  daily  test.  This  is 
done  by  offsetting  debits  and   credits  and  paying 


HEARING  BEFORE   THE  COMMITTEE     81 

debit  balances  in  cash.  No  surer  method  of  re- 
deeming bank  notes  can  be  found  than  to  requii-e 
their  payment  through  clearing  houses.  These 
notes  are  receivable  at  any  clearing  house  in  settle- 
ment of  balances,  and  would  be  received  by  any 
bank  in  payment  of  any  debt  or  liability  to  it. 
They  are  like  bank  checks.  They  are  forwarded 
by  the  banks  for  collection  to  the  banking  associa- 
tions, from  one  to  another,  just  as  they  send 
checks  for  collection  now,  and  in  that  way  the 
amount  is  kept  down  to  the  lowest  point  of  needs 
of  the  business  community.  But,  on  the  other 
hand,  if  the  bank  that  has  made  a  loan  wishes  to 
take  up  that  loan,  it  can  deposit  any  form  of  legal- 
tender  or  clearing-house  notes,  no  matter  by  whom 
issued  — 

Mr.  Hill.  But  in  the  interim,  while  they  do 
not  wish  to  take  it  up,  it  is  still  redeemable  at  the 
clearing  house. 

Mr.  GiLMAN.  Yes  ;  it  must  be  received  at  the 
clearing  house  and  redeemed  by  the  bank. 

Mr.  Hill.    It  is  only  redeemed  by  the  bank  — 

Mr.  GiLMAN.    As  well  as  by  the  clearing  house. 

Mr.  Hill.  Exactly  ;  that  is  what  I  supposed. 
But  what  provision  has  the  clearing  house  to  re- 
deem it,  with  no  money  on  hand  ? 

Mr.  GiLMAN.  The  same  as  any  check.  Checks 
are  paid  at  all  clearing  houses  to  the  amount  of 
150,000,000,000  per  annum.  The  collection  would 
give  the  banks  no  trouble,  because  they  would 
simply  forward    the  notes    for    collection   to   the 


82  FEDERAL  CLEARING  HOUSES 

bank,  and  tlie  payment  would  have  to  be  made. 
Payment  is  required  —  cash  payment. 

Mr.  Fowler.  I  understand  Mr.  Hill's  ques- 
tion was,  How  do  they  pay  it  ?  They  do  not  pay 
it  at  all.  They  act  as  agents  to  forward  it  for 
collection. 

Mr.  GiLMAN.  They  put  it  to  the  credit  of  the 
depositor  ;  that  is  payment.  They  pay  it  out  or 
send  it  on  for  collection,  as  they  choose. 

Mr.  Hill.  They  issue  a  certificate  of  credit  to 
a  bank,  and  that  certificate  of  credit  performs  the 
function  of  a  bank  bill.  Now,  then,  suj^pose  the 
bank  has  taken  it  out  against  time  securities. 
Then,  of  course,  they  have  to  be  responsible,  as 
they  would  for  the  j^ayment  of  their  own  bank 
notes.  But  where  is  the  power  of  the  clearmg 
house  in  the  mean  time  ? 

The  Chairman.  What  Mr.  Hill  desires  to 
know  is  what  you  mean  when  you  say  '•  the  j^arty" 
will  redeem  it.     What  party  ?    Where,  who,  how  ? 

Mr.  GiLMAN.  The  operation  is  a  very  simple 
one,  indeed.  The  bank  which  wishes  to  take  out 
clearing-house  currency  would  apply  to  the  clear- 
ing house  and  deposit  securities,  and  if  the  securi- 
ties were  approved  by  the  loan  committee,  the 
clearing  house  would  issue  its  notes  to  the  bank  at 
75  per  cent  of  the  appraised  value  of  the  securi- 
ties. The  bank  would  then  use  the  notes  for  the 
payment  of  depositors  or  any  purpose  in  the  ordi- 
nary course  of  their  business.  Those  bills  might 
come  on  to  New  York,  and  if  they  were  sent  to  us, 


HEARING  BEFORE   THE  COMMITTEE     83 

for  instance,  we  might  pay  them  out  or  deposit 
them  in  our  bank.  Our  bank,  if  it  had  an  accu- 
mulation of  those  notes  more  than  it  could  use  to 
advantage,  would  sort  them  out  — 

The  Chairman.  When  you  say  "  more  than 
they  could  use  to  advantage,"  what  do  you  mean  ; 
do  you  mean  pay  them  out  ? 

Mr.  GiLMAX.  Yes ;  more  than  they  can  pay 
out  in  the  ordinary  course  of  their  daily  opera- 
tions —  they  would  sort  out  those  notes  and  for- 
ward them  to  the  different  centres  of  collection. 

Mr.  Hill.     Clearing  houses  — 

Mr.  Oilman.  Or  to  their  correspondents  for 
collection,  the  same  as  any  draft.  They  weuld 
then  be  presented  to  the  bank  that  had  made  the 
obligation.      They  would  be  its  demand  obligation. 

Mr.  Hill.     How  do  they  identify  them  ? 

Mr.  Oilman.  The  bill  provides  that  the  notes 
shall  state  on  the  face  to  whom  they  are  issued, 
and  the  bank  whose  demand  obligation  they  are 
must  pay  them  in  cash  that  is  satisfactory  to  the 
clearing  house. 

If  fl,000  of  them  are  presented,  the  bank 
would  send  fl,000  of  gold  or  currency  or  a  check 
or  whatever  would  be  acceptable  to  the  clearing 
house  that  had  issued  them,  and  that  must  be  done 
on  the  day  that  demand  is  made,  for  the  purpose 
of  securing  absolute  payment  of  the  notes,  and  to 
keep  them  at  the  lowest  point  that  is  needed  for 
the  demands  of  business. 

Mr.  Hill.    Then   it  resolves  itself  practically 


84  FEDERAL   CLEARING  HOUSES 

into  an  unlimited  issue  of  the  bank  bill  by  the 
individual  banks,  with  the  guarantee  of  all  the 
banks  composing  the  clearing  house,  and  the  bank 
itseK  must  provide  its  own  redemption,  and  not 
the  clearing  house  for  the  redemption  of  the 
money. 

Mr.  GiLMAN.     Yes  ;  if  you  will  allow  me  — 

Mr.  Cox.  It  does  not  go  that  far  by  a  long 
shot. 

Mr.  Capron.  That  is  the  point.  In  regard  to 
the  return  of  the  note  to  the  clearing  house,  won't 
you  explain  that  ? 

Mr.  Hill.  Your  illustration  of  France  and 
Germany  is  utterly  inconsistent,  I  think  you  will 
find,  if  you  will  examine  caref uUy  the  French  and 
German  systems,  because  they  are  required  to 
hold  33  per  cent,  reserve. 

Mr.  GiLMAN.  The  Bank  of  France  is  entirely 
free,  and  is  under  no  restriction,  except  that  of 
prudent  management,  to  maintain  any  percentage 
of  reserve.  It  could  pay  out  aU  its  reserve  to 
sustain  the  commercial  credit  of  France  if  it  so 
desired,  without  the  violation  of  any  law.  The 
six  banks  of  issue  of  Germany  are  required  to 
maintain  a  reserve  of  33 ^  per  cent,  of  their  note 
issues,  but  they  have  besides  an  unlimited  power 
of  note  issue  for  emergencies.  The  French  and 
German  systems  are  therefore  amply  protected 
against  monetary  troubles,  and  they  have  no  bank 
panics  in  those  countries.  Our  country  should  be 
protected  in  the  same  way.     If  you  wiU  allow  me 


HEARING  BEFORE  THE  COMMITTEE     85 

to  make  another  correction  of  Mr.  Hill's  remark, 
and  that  was  he  said  the  proposed  issue  is  unhm- 
ited.     It  is  limited  to  — 

Mr.  Hill.     Seventy-five  per  cent.  — 

Mr.  Oilman.  No;  limited  to  the  par  of  the 
banking  capital  of  the  bank. 

Mr.  Hill.      The  clearing-house  notes  are  ? 

Mr.  GiLMAN.  No  bank  can  take  out  more  clear- 
ing-house notes  than  the  par  of  its  capital. 

Mr.  Hill.  Then  it  is  really  double  —  that  is, 
in  addition  to  their  own  bank  issues  ? 

Mr.  Oilman.     Yes. 

Mr.  Fowler.  Do  I  understand  that  the  clear- 
ing house  as  an  organization  is  responsible  for  a 
single  cent  of  the  obligations  issued  by  any  bank  ? 

Mr.  Oilman.  The  clearing  houses  are  respon- 
sible, and  they  hold  securities  to  protect  them- 
selves against  all  loss,  which  have  been  approved 
by  their  loan  committee.  The  clearing  houses 
would  also  make  a  profit  on  the  loans  which  would 
compensate  them  for  the  risk. 

Mr.  Fowler.  No.  Suppose  the  bank  fails  and 
the  notes  are  perfectly  wortliless ;  who  pays  the 
notes  that  that  bank  has  issued  —  those  clearing- 
house certificates? 

Mr.  Oilman.  The  clearing  houses,  in  the  first 
place,  from  the  proceeds  of  the  sale  of  the  collateral 
securities  in  their  hands.  If  there  is  any  defi- 
ciency, it  is  assessed  upon  the  members  of  that 
clearing  house. 

Mr.  Fowler.    And  a  provision  is  made  for  an 


86  FEDERAL   CLEARING  HOUSES 

assessment ;  in  other  words,  a   mutual  guarantee 

system  ? 

Mr.  GiLMAN.     So  it  is  distributed  as  it  was  — 
The    Chairman.     Current    redemption   of   the 

bank,  final  redemption  of  the  clearing  house.    Mr. 

McCleary  has  the  floor. 

At  this    point   the  committee    adjourned  until 

Saturday,  April  16,  1898,  at  10.30  o'clock  A.  M. 

Saturday^  April  16,  1898. 

The  committee  met  at  10.30  A.  m.,  Hon.  Joseph 
H.  Walker  in  the  chair. 

Present :  Messrs.  Walker,  Fowler,  Spalding, 
Prince,  Newlands,  and  Ermentrout. 

The  Chairman.  Mr.  Gilman,  if  you  want  to 
add  anything  to  your  statement  of  the  other  day, 
we  will  begin  there. 

Mr.  Gilman.  I  wish  to  begin  with  an  histori- 
cal note. 

After  the  Revolution  the  process  began  of 
changing  our  laws  and  customs  to  bring  them  into 
harmony  with  the  principles  of  the  Declaration  of 
Independence.  Our  banking  system  was  based 
on  the  English  model,  and  all  the  banks  of  the 
United  States  were,  like  the  Bank  of  England, 
organized  under  special  charters. 

The  Bank  of  the  United  States  was  the  most 
conspicuous  example  of  this  system,  and  General 
Jackson  overthrew  it  "to  preserve  the  morals  of 
the  people  and  the  purity  of  the  elective    fran- 


HEARING  BEFORE  THE   COMMITTEE     87 

chise."  The  free  or  general  banking  law  of  tlie 
State  of  New  York  was  then  enacted,  April  18, 
1838,  and  was  called  a  second  declaration  of  inde- 
pendence. Banking  in  the  United  States  on  re- 
publican principles  dates  from  that  time.  Its  two 
features  were  a  general  law  and  a  secured  cur- 
rency. Those  principles  have  been  maintained 
until  the  present  time,  and  are  now  the  basis  of 
the  National  Bank  Act.  Bill  H.  K.  9279  does  not 
dej)art  from  these  principles,  and  the  only  changes 
it  proposes  are  to  substitute  the  clearing  house, 
incorporated  under  federal  law,  in  place  of  an 
officer  of  the  government  as  trustee  for  the  public 
to  hold  the  collateral  to  the  circulating  notes,  and 
bank  assets  as  the  security  instead  of  government 
bonds. 

I  would  like  to  emphasize  the  point  that  the 
interests  of  the  people  are  separate  from  and  an- 
tagonistic to  the  interests  of  the  banks  under  a 
banking  system  with  an  unsecured  currency  and  a 
reserve  of  a  certain  percentage  of  obligations,  pro- 
vided there  is  no  means  of  increasing  reserves 
except  by  compelling  liquidations  by  the  borrow- 
ing public. 

Out  of  many  authorities  on  the  subject  I  will 
read  from  S.  Hooper's  book  entitled  "  Currency 
and  Money." 

The  Chairman.     Samuel  Hooper,  of  Boston  ? 

Mr.  GiLMAN.  Yes ;  he  writes  as  "  a  merchant 
of  Boston,"  and  once  was  a  member  of  the  House 
of  Representatives.     He  says  :  — 


88  FEDERAL  CLEARING  HOUSES 

Whenever  the  demand  for  specie  has  become  so  ur- 
gent that  it  is  difficult  to  meet  it,  the  banks  that  have 
issued  the  paper  money  become  aharmed  for  their  abil- 
ity to  pay  specie.  Then  commences  the  remedy  for  the 
depreciation  of  such  a  currency.  When  the  demand  for 
specie  has  become  so  intense  or  the  quantity  of  it  so 
much  diminished  as  to  alarm  the  banks,  the  remedy 
commences.  It  is  a  sure  though  a  sharp  remedy.  It  is 
brought  into  operation  by  stopping  all  discounts  at  the 
banks  and  requiring  the  payment  of  all  previous  loans 
as  they  fall  due.  Traders  and  merchants  are  forced  at 
such  times  to  make  great  efforts  to  obtain  money  to  pay 
back  their  loans  to  the  banks.  To  do  this  they  must 
sell  property  at  low  prices  or  borrow  money  at  exorbi- 
tant rates.  This  is  the  only  process  by  which  to  remedy 
the  depreciation  of  a  mixed  currency  consisting  partly 
of  paper  money  redeemable  on  demand  in  specie.  It  is 
a  process  which  invigorates  the  currency  at  the  expense 
of  the  industry  and  the  enterjjrise  of  the  country. 

And  hear  what  Hon.  Nathan  Appleton,  of  Bos- 
ton, said,  as  quoted  by  Mr.  Hooper  :  — 

But  these  alternations  of  bank  expansions  and  nomi- 
nal prosperity  followed  by  bank  contraction,  disappoint- 
ments, and  perhaps  failures,  are  very  much  to  be  depre- 
cated. The  banks,  to  be  sure,  have  no  difficulty  in  these 
cases  if  well  managed  ;  the  whole  pressure  is  thrown  on 
the  mercantile  community. 

The  Chairman.    The  whole  pressure  of  what? 

Mr.  Oilman.  Of  a  bank  crisis ;  of  a  panic. 
The  banks  do  not  suffer ;  the  whole  pressure  of 
the  panic  is  thrown  on  the  mercantile  community. 
Mr.  Hooper  continues :  — 


HEARING  BEFORE   THE  COMMITTEE     89 

If  paper  money  is  ever  useful  to  a  country  it  can  only 
be  in  great  emergencies,  and  it  should  be  reserved  as  a 
resource  to  supply  the  means  for  the  defense  of  the 
country  when  other  resources  are  exhausted.  At  such 
a  time  it  may  be  used  for  the  business  transactions 
within  the  country  to  relieve  the  coin  from  that  service 
so  that  it  may  be  used  by  the  government  in  the  exi- 
gency for  the  common  welfare. 

Now,  that  is  exactly  what  I  said,  and  1  did  not 
know  that  Mr.  Hooper  had  said  it. 

No  blame  should  be  imputed  to  the  banks  or  to  their 
directors  for  the  inconvenience  and  distress  caused  by 
forced  liquidation.  They  have  consulted  only  the  inter- 
ests of  the  banks.  In  doing  so  they  were  true  to  the 
system. 

Mr.  Fowler.     Read  that  again. 

Mr.  GiLMAN  (reading).  "  In  doing  so  tbey 
were  true  to  the  system."  That  is,  when  they 
carry  out  the  system  according  to  its  legal  provi- 
sions. 

Mr.  Fowler.  It  means  more  than  that.  It 
means  they  were  true  to  the  principle  of  banking. 

Mr.  GiLMAN.  If  you  wiU  aUow  me  to  finish 
this  I  think  you  will  see  he  refers  to  the  system  of 
banking  then  prevailing. 

Mr.  Fowler.  I  know  ;  but  he  refers  not  to  the 
system  of  banking  in  any  given  time  in  the  world's 
liistory,  but  to  every  relation  which  banking  bears 
to  commerce. 

Mr.  GiLMAN.  No ;  he  refers  to  banking  under 
this  particular  peculiar  system. 


90  FEDERAL   CLEARING  HOUSES 

Mr.  Fowler.     What  system  ? 

Mr.  Oilman.  This  system  of  a  large  mimber  of 
banks  issuing  currency  and  holding  the  security 
themselves,  which  creates  lack  of  confidence. 

The  Chairman.     Each  independent  bank  ? 

Mr.  GiLMAN.  Each  holding  security  in  its  pos- 
session and  issuing  its  own  notes.  When  a  lack 
of  confidence  strikes  the  country,  and  these  notes 
are  sent  home  and  the  banks  will  not  take  them 
from  their  customers,  and  some  banks  fail  and 
banking  facilities  are  withdrawn,  and  their  custom- 
ers are  compelled  to  liquidate  and  forced  to  sell 
out  at  great  loss,  then  the  panic  which  residts  from 
this  state  of  affairs  is  due  to  the  system  — 

The  Chairman.  You  mean  due  to  the  system 
that  protects  them  ? 

Mr.  GiLMAN.     I  am  just  quoting  his  words  — 

The  interest  of  the  bank  is  at  variance  with  the  pub- 
lic interest.  The  customers  of  the  bank  sustain  the  loss 
while  the  banks  liave  had  the  profit  — 

The  Chairman.     Who  says  that  ? 

Mr.  GiLMAN.  That  is  what  Hooper  says.  Then 
he  goes  on  — 

The  Chairman.     Let  us  have  that. 

Mr.  GiLMAN.  And  says  that  he  advocates  as  a 
first  step  to  reform  — 

That  all  banking  should  be  under  a  general  banking 
law,  and  secondly,  that  banks  should  be  required  to 
place  security  for  their  currency  in  the  hands  of  a 
trustee. 


HEARING  BEFORE  THE  COMMITTEE     91 

These  are  tlie  two  points  behind  the  national 
banking  law  — 

Mr.  FoAVLER.  I  beg  your  pardon  ;  you  are  mis- 
taken. All  the  banks  of  the  South  and  those  fol- 
lowing the  New  York  guarantee  system,  where 
they  put  up  the  securities  themselves,  put  up  state 
securities  and  every  kind  of  security,  and  the  re- 
sult was  that  they  broke  down  completely.  They 
absolutely  destroyed  the  banks,  and  right  by  the 
side  of  it  and  succeeding  it  the  system  of  issuing 
notes  by  the  banks  of  the  South  went  on,  and 
through  all  these  crises  stood  and  sustained  them- 
selves and  did  not  fail. 

The  Chairman.  That  is  a  matter  which  is  abso- 
lutely incontrovertible.  All  statistics  prove  that 
fact. 

Mr.  Newlands.     Then  Hooper  is  wrong. 

Mr.  Fowler.  If  you  will  allow  me,  the  possible 
defense  of  the  proposition  is  this,  the  distinction  is 
this,  rather,  that  what  you  propose  to  put  up  is 
current  liquidated  wealth  ;  that  is  the  only  defense 
you  have  and  that  is  your  defense.  In  your  case 
they  put  up  the  current  liquidated  wealth  of  the 
country,  while  under  the  system  of  New  York  and 
the  one  he  refers  to  they  put  up  the  time  obliga^ 
tions  of  the  State,  mercantile,  etc.  ;  and  there  are 
a  great  many  men  in  the  country  to-day  who,  if 
they  exliausted  our  government  bonds,  would  put 
up  raiboad  bonds,  school  bonds,  and  every  other 
sort  of  thing,  and  the  whole  thing  has  been  ac- 
cepted historically  in  every  part  of  the  world,  and 
more  particularly  in  this  part  of  the  country. 


92  FEDERAL  CLEARING  HOUSES 

Mr.  Oilman.  There  have  never  been  any  losses 
on  the  clearing-house  certificates  ;  never  have  been, 
and  never  can  be. 

There  have  never  been  any  losses  on  national 
bank  notes  secured  by  government  bonds,  and 
never  can  be.  These  are  the  two  most  recent  in- 
stances of  bank  currency  secured  by  assets  in  the 
hands  of  a  trustee.  The  losses  referred  to  by  Mr. 
Fowler  were  due  to  defective  security  and  not  to 
the  principle  of  a  trusteed  or  secured  currency. 
Many  railroad  bonds  have  become  worthless,  but 
no  one  advocates  on  that  account  to  abandon  the 
idea  of  havmg  a  trustee  under  the  mortgage.  A 
trusteeship  is  a  necessity  where  the  ownership  of 
the  obligations  is  participated  in  by  many  different 
persons.  The  Georgia  law  of  1838,  if  I  remem- 
ber correctly,  allowed  slaves  to  be  used  as  collateral 
to  bank  notes.  The  limitation  to  specific  classes 
of  collateral  is  wrong  in  principle.  The  banks 
should  be  allowed  to  pledge  their  assets,  and  the 
trustee  —  that  is,  the  clearing  house  or  their  loan 
committee  acting  for  them  —  should  determine  as 
to  the  sufficiency  of  the  collateral.  Experience 
shows  that  by  tliis  method,  on  account  of  their 
contingent  liability,  the  clearing  houses  will  exer- 
cise great  prudence  to  protect  themselves  from 
loss,  and  in  so  doing  they  protect  the  public  also. 

The  Chaikman.  Let  me  ask  you  a  few  ques- 
tions. How  would  the  capital  of  the  clearing 
houses  be  furnished  ? 

Mr.  Oilman.     The  clearing  house  is  only  the 


HEARING  BEFORE   THE  COMMITTEE     93 

representative  of  the  associated  banks.  There  is 
no  separate  capital,  but  a  clearing  house  has  the 
responsibihty  of  all  the  capital  of  its  bank  members. 
Clearing  houses  are  trustees  in  this  bill. 

The  Chairman.   '  Trustees  of  nothing  ? 

Mr.  GiLMAN.     To  hold  absolute  security  — 

The  Chairman.  That  brings  us  right  to  the 
point.  What  is  the  absolute  security  they  are  to 
hold? 

Mr.  GiLMAN.  They  are  to  hold  such  assets  as 
the  banks  offer  them,  and  which  the  loaning  com- 
mittee approve  as  good. 

The  Chairman.  Just  give  us  a  list  of  the 
assets. 

Mr.  GiLMAN.  The  hst  of  the  assets  would  be 
commercial  assets,  promissory  notes,  bills  of  ex- 
change, convertible  bonds  and  stocks,  and  other 
securities  and  evidences  of  debt.  These  assets  are 
to  be  received  as  collateral  security  for  the  circu- 
lating notes  of  the  said  association. 

Mr.  Spalding.     To  the  extent  of  75  per  cent.  ? 

Mr.  GiLMAN.  The  notes  are  to  be  issued  at 
75  per  cent,  of  the  appraised  value  of  the  assets. 

The  Chairman.  Now,  the  idea  of  Mr.  Appleton 
and  Mr.  Hooper  —  both  of  whom  I  knew,  and  I 
have  talked  over  these  financial  matters  with  them 
—  in  what  you  have  quoted,  went  to  the  point  of 
the  coin  redemption  of  currency  notes  issued  by 
banks.  Now,  what  provision  do  you  make  for 
maintaining  the  parity  between  paper  money  and 
coin,  and  how  ?     Their  point  was  that  that  should 


94  FEDERAL   CLEARING  HOUSES 

be  maintained  with  more  certainty  and  without 
injury  to  the  public.     What  is  your  scheme  ? 

Mr.  Oilman.  Bill  H.  R.  9279  provides  that 
security  which  is  convertible,  and  which  is  ap- 
proved as  good  security,  is  deposited  with  the 
clearing  house  as  collateral  for  the  loan  of  its  cir- 
culating  notes  ;  and  tlie  collateral  security  provides 
for  the  ultimate  payment  of  these  outstanding 
notes,  the  notes  being  issued  at  75  per  cent,  on 
securities  supposed  to  be  worth  par,  100  cents. 
The  coin  value  of  those  securities  being  100  per 
cent.,  notes  to  the  extent  of  75  jDcr  cent,  of  the 
value  are  issued  on  them,  and  that  is  like  lending 
75  per  cent,  of  the  coin  value. 

The  Chairman.  That  we  have  understood  — 
that  is  all  clear  —  but  that  does  not  meet  the 
point  at  all.  How  is  the  clearing  house  to  get  the 
coin  to  redeem  the  notes  ? 

Mr.  Oilman.  A  clearing  house  is  a  place  for 
the  mutual  set-off  of  debits  and  credits.  If  the 
coin  is  not  provided  to  pay  the  notes  by  the  banks 
whose  obligations  they  are  upon  the  day  of  demand, 
the  loan  committee  of  the  clearing  house  must  sell 
those  assets  to  provide  the  money  to  take  up  those 
notes,  and  they  have  a  margin  of  25  per  cent,  to 
protect  them,  and  if  that  margin  is  not  sufficient, 
then  any  loss  is  to  be  assessed  upon  the  members 
of  the  clearing  house. 

Mr.  FowxER.     If  exceeding  — 

Mr.  Oilman.     The  securities. 

Mr.  Fowler.  Not  only  that,  but  they  stiU 
have  a  claim  against  the  bank  ? 


HEARING  BEFORE   THE   COMMITTEE     95 

Mr.  GiLMAN.     Yes. 

The  Chairman.  Is  your  answer,  then,  that  the 
coin  to  redeem  these  notes  and  all  responsibility 
for  their  redemption  is  to  be  universal,  as  it  was 
under  the  Suffolk  system  in  New  England,  on  the 
banks,  and  the  clearing  house  is  to  be  absolved 
from  that  ? 

Mr.  GiLMAN.  The  clearing  house  represents  all 
its  bank  members.  The  bank  borrowing  money 
of  the  clearing  house  is  the  first  guarantor,  and  if 
a  loss  occurs  on  a  loan  it  is  assessed  on  the  other 
members. 

I  do  not  think  the  Suffolk  system  is  parallel. 
The  Suffolk  Bank  was  the  redeeming  agent  for 
banks  of  New  England,  each  providing  its  own 
redemption  fund.  I  do  not  think  there  was  any 
mutual  responsibility  under  that  system.  The 
Suffolk  Bank  system  does  not  provide  a  currency 
which  circidates  in  the  community,  but  one  which 
gravitates  in  a  straight  line  for  the  redemption 
bank.  It  is  a  question  whether  it  does  not  make 
money  scarce  in  the  country  and  plenty  in  financial 
centres. 

The  Chairman.  I  mean,  absolved  from  that 
obligation  ? 

Mr.  GiLMAN.  No.  The  clearing  house  is  acting 
simply  as  trustee  for  the  public  to  hold  these 
securities,  and  if  the  debt  is  not  paid  on  demand, 
the  loan  committee  then  administers  those  securi- 
ties and  they  provide  the  money  by  their  sale.  If 
there  is  a  loss  which  the  borrowing  bank  cannot 


96  FEDERAL   CLEARING  HOUSES 

pay,  it  is  assessed  on  tlie  other  members  of  the 
clearing  house. 

The  Chairman.  When  you  say  a  "  debt,"  you 
mean  when  the  currency  is  presented  and  it  is  not 
redeemed  they  have  to  sell  these  securities  ? 

Mr.  GiLMAN.  When  any  of  the  currency  which 
has  been  issued  to  the  bank  is  not  paid  upon  de- 
mand by  that  bank,  that  makes  the  loan  immedi- 
ately due,  and  the  clearing  house,  as  trustee,  woidd 
immediately  proceed  to  market  those  securities 
and  close  out  the  loan,  and  would  have  then  a 
claim  against  the  bank  for  any  deficiency,  and  if 
the  bank  was  insolvent  the  deficiency  would  be 
assessed  upon  — 

The  Chairman.  What  do  you  mean  by  closmg 
out  these  securities  ? 

Mr.  Oilman.  Sellmg  them  for  coin  or  legal 
tender. 

The  Chairman.  You  mean  to  say  the  clearing 
house  would  sell  those  securities  to-day  for  gold 
and  redeem  these  currency  notes  that  they  have 
issued  and  loaned  to  the  bank  in  the  gold  that  they 
got  from  the  sale  of  these  securities  ? 

Mr.  Oilman.  Yes ;  in  the  gold  or  other  legal 
tender. 

Mr.  Prince.  Now,  to  make  it  plain  to  me,  sup- 
pose I  have  a  twenty-dollar  bill  issued  by  the  First 
National  Bank,  say,  of  Galesburg,  111.,  under  your 
proposed  bill.  I  present  that  twenty-dollar  bill  to 
the  bank  and  it  refuses  to  pay.  I  ask  for  the  gold 
and  they  refuse  to  pay  it.     Do  I  miderstand  you 


HEARING  BEFORE  THE  COMMITTEE     97 

to  say  that  thereupon  the  clearing-house  associa- 
tion proceeds  to  dispose  of  the  assets  or  securities 
placed  in  the  hands  of  the  trustees  in  the  clearing- 
house association,  and  that  those  securities  are  con- 
verted into  coin,  and  out  of  that  fund  or  coin  I 
am  to  be  paid  the  twenty  dollars  ? 

Mr.  GiLMAN.  No  ;  the  banks  wait  for  the  liqui- 
dation, not  the  public. 

Mr.  Prince.  How  long  am  I  to  wait  ?  Say  I 
am  a  poor  man,  and  present  my  twenty  dollars  as 
a  result  of  my  month's  work  ;  say  I  bring  that  to 
the  bank,  which  refuses  to  pay  me,  and  I  want  to  pay 
my  rent,  and  if  I  do  not,  I  will  be  put  out  of  my 
house  the  next  day  ;  how  am  I  to  get  my  money? 

Mr.  GiLMAN.  Under  tliis  law  the  banks  guar- 
antee the  payment  of  that  money.  All  you  have 
to  do  to  get  your  twenty  dollars  is  to  deposit  the 
twenty  dollars  to  your  credit,  or  get  some  friend  to 
do  it  if  you  have  not  a  bank  account,  and  get  the 
money.  Then  the  whole  process  of  presenting  that 
note  is  handed  over  to  your  bank  and  they  relieve 
the  business  community  of  the  whole  matter,  and 
that  note  would  be  deposited  in  the  clearing  house 
in  payment  of  the  obligations  of  the  bank  to  the 
clearing  house,  and  whoever  had  that  note  and 
wanted  to  collect  it  would  send  it  to  the  bank 
and  demand  payment ;  so  that  the  whole  thing  is 
taken  out  of  your  hands,  and  you  do  not  have  to 
go  to  the  issuing  bank  to  get  your  money,  but 
you  simply  put  it  in  your  bank  and  get  the  money. 

Mr.  Prince.     But  I  have  no  bank  account  and 


98  FEDERAL   CLEARING  HOUSES 

I  go  to  the  bank  which  has  issued  this  twenty 
dollars.  I  have  worked  for  this  money,  and  I  go 
to  the  First  National  Bank,  if  you  please,  of  the 
city  of  Galesburg,  which  has  promised  itself  to  pay 
this  twenty  dollars,  and  the  clearing  house  has 
promised  that  this  bank  will  pay  it.  It  is  issued 
through  the  clearing  house  by  this  First  National 
Bank  of  Galesburg  under  your  bill.  I  present  the 
bill  to  that  bank  and  that  bank  refuses  to  pay  the 
bill.  It  is  insolvent ;  it  has  collapsed  and  gone. 
Shall  I  wait  around  the  corner  somewhere  until 
something  is  done  ? 

Mr.  GiLMAN.  Say  you  went  to  the  bank  and 
found  a  notice  on  the  door,  "  This  bank  is  closed 
and  in  the  hands  of  a  receiver."  Your  note 
would  be  guaranteed  by  the  remaining  banks  of 
the  clearing  house  and  its  goodness  would  be  un- 
questioned and  no  one  would  think  of  refusing  to 
take  it  at  par. 

Mr.  Prince.     Is  it  legal  tender  ? 

Mr.  GiLMAN.     It  is  not  legal  tender. 

Mr.  Prince.  But  suppose  the  man  refuses  to 
take  it ;  suppose  a  man  does  not  want  to  take  it  ? 

Mr.  GiLMAN.  Then  you  could  put  it  in  an- 
other bank.  It  is  supposed  that  anybody  who  has 
a  small  bill  to  pay  can  find  a  friend  who  has  a 
bank  account  himself  and  get  him  to  deposit  that, 
and  the  bank  assumes  the  collection  of  the  note 
and  the  twenty  dollars  is  put  to  his  credit  and  he 
can  draw  it  out  and  give  you  the  gold  mimediately 
on  the  day  he  put  it  in  the  bank  ;  any  holder  could 


HEARING  BEFORE   THE  COMMITTEE     99 

get  the  gold  or  the  legal  tenders  for  the  bill  of  that 
broken  bank  immediately,  in  spite  of  the  failure. 
The  banks  would  attend  to  the  whole  matter. 

Mr.  Pkince.     Let  me  get  it  a  little  plainer. 

Mr.  Spalding.  Put  the  reverse  of  the  proposi- 
tion —  how  would  you  collect  yoiu'  bill  ? 

Mr.  Prince.  I  can  explain  that  later  on  when 
the  time  comes.  I  have  this  bill  of  twenty  dollars, 
and  I  owe  Mr.  Fowler  rent  for  the  house  in  which 
I  hve.  He  has  sued  upon  that  for  forcible  entry 
and  detainer  to  get  me  out.  He  want^  me  out, 
and  if  I  tender  him  the  twenty  doUars  I  owe  him, 
which  is  the  amount  of  rent  and  all  costs  up  to 
date,  say  it  just  covers  twenty  dollars,  I  take  twenty 
dollars  of  that  kind  of  money  issued  through  the 
clearing:  house  to  this  bank  and  the  bank  does  not 
pay  me.  I  stop  by  Mr.  Fowler  and  I  say,  "  Here 
it  is,"  and  he  says,  "  It  is  not  legal  tender,  and  if 
not  legal  tender  I  will  not  accept  it."  And  I 
tender  it  to  the  court  and  the  court  refuses  to 
accept  it. 

I  then  look  aroimd,  and  I  have  no  bank  account, 
and  I  have  no  friends ;  I  am  without  a  friend  on 
earth,  and  I  have  a  family,  and  I  am  liable  to 
be  turned  out  of  my  home.  What  shall  I  do? 
Where  shall  I  go  to  get  the  money  to  pay  Mr. 
Fowler,  who  will  not  take  the  bill  I  have  ? 

Mr.  GiLMAN.  You  can  go  to  any  bank,  even  if 
you  were  not  known  to  the  bank.  If  there  was 
any  bank  in  the  district,  say  ten  miles  off,  you 
could  go  to  that  bank  and  get  your  money.     The 


100  FEDERAL   CLEARING  HOUSES 

profit  to  the   banks  on  the  currency  would  lead 
them  to  take  care  of  its  credit. 

The  Chairman.  What  is  the  provision  of  law 
in  regard  to  that  ? 

Mr.  GiLMAN.  This  law  provides  that  these 
notes  are  good  at  the  clearing  house,  and  conse- 
quently any  bank  that  has  those  notes  can  pay 
them  to  the  clearing  house  in  satisfaction  of  any 
debt  against  it,  and  that  makes  them  current  all 
over  the  country. 

Mr.  Fowler.  W  ill  they  take  them  without  dis- 
count ? 

Mr.  GiLMAN.    Without  discount. 

Mr.  Fowler.  Take  Mr.  Prince's  case.  Sup- 
pose he  went  to  a  bank  next  door,  and  said :  The 
First  National  Bank  is  closed  which  issued  this 
note  for  twenty  dollars  ;  at  what  rate  of  discount, 
if  any,  would  they  take  this  twenty  dollar  bill  ? 

Mr.  GiLMAN.  They  are  obliged  to  take  it  at 
par.  They  can  afford  to  pay  par  because  it  is 
good  in  the  clearing  house. 

Mr.  Fowler.  They  are  not  compelled  to  take  it  ? 

Mr.  GiLMAN.  Section  13,  line  8,  of  the  bill 
9279  provides  that  the  circulating  notes  "  shall  be 
received  at  par  at  all  the  clearing  houses  in  the 
United  States  organized  under  this  act,"  and  in 
section  12,  line  17,  it  provides  that  "  payment  is 
guaranteed  by  the  associated  banks  of  the  United 
States  through  any  clearing  house."  I  suppose  no 
other  party  can  be  compelled  to  take  a  note  that 
is  not  legal  tender. 


HEARING  BEFORE  THE  COMMITTEE     101 

Mr.  Fowler.  Oh,  yes,  they  can  ;  national  bank 
notes  are  not  legal  tenders,  and  banks  are  com- 
pelled to  take  those. 

Mr.  GiLMAN.  National  banks  are  not  compelled 
to  give  legal  tenders  or  gold  for  national  bank 
notes  issued  by  other  national  banks.  Mr.  Prince 
would  be  in  the  same  fix  with  his  twenty-dollar 
national  bank  note  as  if  it  were  clearing-house  cur- 
rency. A  national  bank  is  only  compelled  to  take 
it  "  for  any  debt  or  liabihty  to  it."  So  his  land- 
lord could  refuse  to  accept  a  national  bank  note, 
and  national  banks  coidd  refuse  to  give  him  gold 
or  legal  tender  for  it,  and  he  would  have  to  call  in 
a  friend,  just  as  I  have  suggested.  As  a  matter 
of  fact,  national  bank  notes  and  clearing-house 
currency  woidd  both  circidate  without  question. 
It  is  provided  that  these  notes  shall  be  received  at 
any  clearing  house,  and  that  makes  them  at  par. 

Mr.  Fowler.  How  are  you  going  to  get  them 
there  ?  Who  is  going  to  get  them  there  ?  Suppose 
the  man  was  miles  away  from  the  clearing  house. 

Mr.  Prince.  Suppose  the  clearing  house  was 
in  Chicago  and  I  am  here. 

Mr.  GiLMAN.  Competition  in  business  is  so 
active  that  no  difficulty  is  ever  experienced  in 
cashing  absolutely  good  currency.  The  great  ob- 
ject is  to  make  the  notes  of  undoubted  goodness, 
and  then  to  make  them  receivable  by  all  banks,  at 
all  clearing  houses  over  the  land,  for  all  debts  due 
to  banks.  These  guarantees  would  make  the  notes 
pass  from  hand  to  hand  without  difficidty.     If  a 


102  FEDERAL   CLEARING  HOUSES 

bank  has  an  accumulation  of  these  notes  on  hand 
it  wouH  immediately  send  them  to  the  issuer  —  to 
the  bank. 

Mr.  FowLEK.  Suppose  they  receive  this  twenty 
dollars  of  Mr.  Prince  and  they  did  not  know  what 
their  assets  were  worth  over  there,  and  he  says  he 
will  not  give  but  fifteen  dollars,  what  protection 
has  Mr.  Prince  got  ? 

Mr.  GiLMAN.  The  failure  of  the  bank  makes 
no  difference  in  the  goodness  of  the  note.  It  is 
guaranteed  by  all  banks.  By  this  process  of  com- 
pelling the  banks  to  accept  these  notes  in  payment 
of  their  credits  at  the  clearing  house  it  throws 
upon  the  banks  the  burden  of  collection.  That  is 
the  point. 

Mr.  FowLEE.  Do  you  not  know  that  a  bank 
always  takes  advantage  of  every  piece  of  paper  put 
to  them  ?  They  will  say,  "I  do  not  know  any- 
thing about  this  thing."  The  cashier  will  say  he 
will  not  take  this  because  he  does  not  know  about  it 
or  he  will  not  give  more  than  fifteen  dollars  for  it. 

Mr.  Pkince.    And  I  owe  you  twenty  dollars. 

Mr.  Fow^LEE.  Would  he  not  be  unfortunate  in 
that  position  ?     That  is  the  point,  I  understand. 

Mr.  Newlands.  That  could  be  entirely  met  by 
making  it  legal  tender  to  the  banks. 

Mr.  GiLMAN.  That  is  accom23lished  by  com- 
pelling the  banks  to  accept  these  tlu'ough  the 
clearing  house. 

The  Chaieman.  Where  does  the  bill  compel 
them  to  accept  directly  ?     What  is  the  provision  ? 


HEARING  BEFORE   THE  COMMITTEE     103 

Mr.  GiLMAN.    I  read  from  the  bill. 

The  Chairman.    What  is  the  section  ? 

Mr.  GiLMAN.  Section  9 ;  if  you  will,  please 
turn  to  section  9. 

Mr.  Newlands.    What  bill  is  this  ? 

Mr.  GiLMAN.  This  is  H.  R.  9279.  The  sev- 
enth line  on  the  ninth  page  :  — 

The  bank  member  taking  said  circulating  notes  shall 
engage  to  redeem  them  at  all  times  when  called  upon  to 
do  so  by  the  clearing  house  issuing  the  notes  and  to  give 
any  additional  collateral  needed  to  restore  any  deprecia- 
tion, etc. 

Now,  look  at  section  10. 

That  each  bank  member  taking  such  circulating 
notes  — 

The  Chairman.  You  want  to  talk  right  on  this 
point.     In  line  7,  page  9,  it  says  this  :  — 

The  bank  member  — 

That  is,  the  bank  member  of  the  clearing  house, 
I  suppose  — 

Taking  said  circulating  notes  shall  engage  to  redeem  at 
all  times  when  called  upon  to  do  so  by  the  clearing 
house  issuing  the  notes. 

Now,  there  is  nothing  giving  a  person  any  right 
to  call  for  the  redemption  of  those  notes  at  the 
bank  except  the  clearing  house  which  issues  them. 

Mr.  Prince.  I  suggest  this,  that  the  bank 
members  shall  be  required  to  redeem  at  all  times 
said  circulating  notes  when  called  upon  so  to  do. 

Mr.  Fowler.    Then  you  make  each  bank  re- 


104  FEDERAL   CLEARING  HOUSES 

deem  the  notes  of  all  banks.  How  are  you  going 
to  fix  it  then  ? 

Mr.  Prince.  The  bank  I  ask  to  pay  the  note 
refuses  to  pay  it.  Then  I  go,  as  Mr.  Fowler  says, 
next  door  and  it  refuses  to  take  it  without  a  dis- 
coimt.  Have  you  any  provision  in  this  bill  that, 
say,  the  Second  National  Bank,  which  is  in  the 
building  next  door  engaged  in  the  banking  busi- 
ness, will  have  to  take  my  note  at  par?  That  is 
the  point  I  want  to  get  at  and  to  clear  up.  This 
provision  does  not  seem  to  me  to  require  it. 

Mr.  GiLMAN.  Nor  does  the  National  Bank  Act 
contain  that  requirement  in  that  form.  The  de- 
mand is  made  by  the  clearing  house,  because  the 
notes  would  actually  come  into  the  hands  of  the 
clearing  house.  I  can  see  that  j^our  suggestion 
would  be  an  improvement  to  the  bill,  and  make  it 
more  clear  on  that  point.  This  provision  in  refer- 
ence to  the  clearing  house  covers  the  whole  coun- 
try, and  any  person  in  any  city  anywhere  having  a 
note  can  deposit  it  in  the  bank,  and  every  bank 
in  the  clearing  house  is  compelled  to  accept  it  in 
settlement  of  the  claims  due  that  bank.  Thus, 
the  collection  of  the  note  falls  upon  the  person 
who  receives  it. 

Mr.  Fowler.    That  would  be  the  depositor  ? 

Mr.  GiLMAN.  The  depositor  puts  it  in  his  bank, 
which  pays  it  to  the  clearing  house ;  and  by  making 
the  clearing  house  accept  it  in  payment  of  balances 
with  all  the  banks  in  the  clearing  house,  that  puts 
the  notes  at  par. 


HEARING  BEFORE   THE   COMMITTEE     105 

Mr.  Newlands.  As  I  understand  your  bill, 
every  bank  member  is  compelled  to  make  redemp- 
tion of  its  notes  it  takes  from  the  clearing  house, 
and  you  say  that  every  other  bank  member  would 
be  willing  to  accept  those  other  notes  issued  by 
another  bank  member  because  he  could  tender 
them  to  the  clearing  house  in  settlement  of  claims 
due  the  clearing  house  from  him  ? 

Mr.  Oilman.    Yes. 

Mr.  Newlands.  Now,  that  is  the  inducement, 
but  there  is  nothing  in  your  law  which  would 
compel  the  other  bank  member  to  take  the  notes 
of  another  bank  and  give  par  value  for  them. 
You  simply  say  the  inducement  is  that  he  can 
make  use  of  those  notes  in  settling  the  claims  of 
the  clearing  house  against  him? 

Mr.  GiLMAN.  Yes.  The  case  would  be  ex- 
actly the  same  as  now  exists  with  national  bank 
notes. 

Mr.  Newlands.  You  are  aware  that  under  the 
National  Bank  Act  any  holder  of  any  national  bank 
note  issued  by  any  bank  can  compel  a  bank  other 
than  the  one  issuing  it  to  take  that  note  in  pay- 
ment of  the  obligation  due  from  hun  to  the  bank? 

Mr.  GiLMAN.  That  ought  to  be  included  in  this 
bill  if  it  is  not  here.  That  point  ought  to  be  cov- 
ered, as  there  is  absolute  security,  and  it  is  no 
hardship  upon  the  banks  to  compel  them  to  accept 
these  notes  from  the  public  as  well  as  through 
clearing  houses.  That  provision  is  in  the  National 
Bank  Act,  was  in  the  old  state  bank  laws,  and  is 


106  FEDERAL   CLEARING  HOUSES 

contained  in  the  present  German  banking  law  of 
March,  1875. 

The  following  sentence  should  be  added  at  the 
end  of  section  13,  page  14,  line  14 :  — 

And  every  bank  member  of  every  clearing  house 
organized  under  this  act  shall  take  and  receive  at  par, 
for  any  debt  or  liability  to  it,  any  and  all  notes  or  bills 
issued  by  any  clearing  house  of  issue  organized  under 
this  act. 

I  would  also  add  innnediately  after  the  above 
the  following  paragraj^h  :  — 

The  meeting  together  of  any  persons  who  are  officers, 
agents,  or  employees  of  persons,  firms,  or  corporations 
in  any  one  or  more  places  once  in  thirty  days  or  oftener 
for  the  purpose  of  exchanging,  paying,  or  in  any  other 
way  satisfying  any  obligations  used  in  commerce  among 
the  several  States  by  any  two  or  more  of  such  persons, 
firms,  or  corporations,  or  for  the  purpose  of  the  settle- 
ment of  money  transactions  by  the  mutual  set-off  of 
debits  and  credits,  commonly  called  "  making  clear- 
ances "  for  banks,  shall  constitute  such  persons,  firms, 
or  corporations  represented  in  such  meeting  a  clearing- 
house association  for  the  purpose  of  the  taxation  herein 
imposed,  and  such  persons,  firms,  or  corporations  repre- 
sented shall  be  jointly  and  severally  liable  to  pay,  and 
shall  pay,  into  the  Treasury  of  the  United  States  a  duty 
in  amount  equal  to  one  fiftieth  of  one  per  centum  on  the 
aggregate  amount  of  all  such  obligations  exchanged, 
paid,  or  in  any  way  satisfied,  or  on  the  aggregate 
amount  of  the  money  transactions  settled  by  the  mutual 
set-off  of  debits  and  credits,  at  each  and  every  meeting 
of  persons  acting  for  such  persons,  firms,  or  corpora- 
tions :  JProulded,  however,  That  in  case  any  such  clear- 


HEARING  BEFORE   THE  COMMITTEE     107 

ing-house  association  pays  one  half  of  the  tax  herein 
imposed  on  or  before  the  day  it  is  due  and  payable,  the 
other  half  shall  be,  and  is  hereby,  remitted  :  A  nd  pro- 
vided further,  That  the  tax  herein  imposed  on  clearing- 
house associations  herein  described  shall  be  wholly  re- 
mitted to  all  members  of  clearing  houses  that  are  incor- 
porated under  this  act. 

I  would  also  add  in  section  9,  page  9,  line  8,  to 
make  it  read  as  follows,  beginning  with  line  7  :  — 

The  bank  member  taking  said  circulating  notes  shall 
engage  to  redeem  them  in  the  lawful  money  of  the 
United  States  at  all  times  upon  demand  of  payment  duly 
made  during  the  usual  hours  of  business  at  the  office  of 
such  bank  member,  and  also  when  called  upon  to  do  so 
by  the  clearing  house  issuing  the  notes,  etc. 

Mr.  Newlands.  Does  your  bill  make  any  pro- 
vision as  to  the  kind  of  coin  every  bank  shall  keep 
on  hand  for  the  redemption  of  the  circulating 
notes  issued  to  it  by  the  clearing  house  ? 

Mr.  GiLMAN.     No. 

Mr.  Newlands.  That  is  left  to  its  own  deter- 
mination and  discretion  ? 

Mr.  GiLMAN.  Yes ;  because  the  present  bank 
law  has  complete  provisions  as  to  reserves,  and 
it  is  best  to  leave  that  law  just  as  it  is.  When 
the  clearing-house  currency  is  secured  by  gold 
values,  and  in  addition  to  that,  when  you  add  25 
per  cent,  of  those  values  to  its  security,  and  also 
add  the  guarantee  of  all  the  banks  in  the  country, 
a  bank  circulation  of  this  description  could  take 
care  of  itself. 


108  FEDERAL  CLEARING  HOUSES 

Mr.  Newlands.  Would  you  expect  the  bank 
to  keep  any  funds  on  hand  for  that  purpose  ? 

Mr.  Oilman.  Not  for  the  purpose  of  providing 
for  notes  in  addition  to  its  other  coin  reserve  ;  no. 

Mr.  Newlands.  What  do  you  regard  as  a  safe 
reserve  for  a  bank  to  keep  against  the  calls  of  its 
dej)ositors  ? 

Mr.  GiLMAN.  I  think  that  the  percentages  of 
reserves  that  should  be  kept  by  banks  dej)end  upon 
the  system  under  which  the  bank  is  operated. 
Now  the  reserves  under  our  national  system  are 
entirely  inadequate,  because  there  is  no  provision 
for  self-preservation,  and  a  diminution  of  those 
reserves  about  6  per  cent,  all  over  the  country  for 
hoarding  purposes  would  cause  a  panic.  But  take 
the  Credit  Lyonnaise  as  an  example.  The  Credit 
Lyonnaise  is  under  the  French  system,  and  its 
advertisements  may  be  seen  in  the  New  York 
papers  and  elsewhere,  giving  a  statement  of  its  con- 
dition. 

It  is  an  immense  bank,  and  it  has  only  about  10 
per  cent,  of  its  obligations  on  hand  m  cash.  That 
is  according  to  a  calculation  I  once  made.  It  has 
10  per  cent,  more  in  call  loans,  and  then  it  has  bills 
receivable  which  it  advertises  are  "  immediately 
discountable  at  the  Bank  of  France  "  to  the  extent 
of  50  per  cent,  of  its  obligations,  and  adding  these 
reserves  together  you  have  70  per  cent,  of  the  obli- 
gations of  the  bank,  which  are  under  their  imme- 
diate call,  and  that  makes  a  strong  and  unpregna- 
ble  position.     It  is  strong  with  only  10  per  cent. 


HEARING  BEFORE  THE  COMMITTEE     109 

in  gold  on  hand ;  but  10  per  cent,  is  sufficient 
under  such  a  system. 

Mr.  Fowler.  Under  the  Credit  Lyonnaise 
system  ? 

Mr.  GiLMAN.  Under  the  system  prevailing  in 
France  where  the  Credit  Lyonnaise  has  its  head 
office. 

The  Chairman.  That  is  to  say,  it  is  one  of  the 
branch  banks  — 

Mr.   GiLMAN.     No,  it  is  not. 

Mr.  Newlands.  He  says,  in  effect,  the  Bank 
of  France  has  branches  ? 

Mr.  GiLMAN.  The  Bank  of  France  supports 
the  whole  banking  system  of  France  with  its  re- 
serve of  1600,000,000  in  gold  and  silver  — 

Mr.  Newlands.  As  against  what  amount  of 
deposits  ? 

Mr.  Gilman.  I  should  say  that  is  about  60  per 
cent,  of  its  obligations.  It  is  85  per  cent.,  I  think, 
of  their  note  circulation,  and  60  per  cent,  or  65 
per  cent,  of  the  entire  obligations,  including  their 
deposits. 

Mr.  Newlands.  You  say  the  amount  of  reserve 
depends  upon  the  system ;  that  under  the  national 
banking  system  of  this  country  the  reserves  are  in- 
adequate. What  reserves  do  you  understand  are 
kept  as  a  rule  by  national  banks  in  this  country  ? 

Mr.  Gilman.  The  reserves  kept  by  the  national 
banks  vary  in  different  parts  of  the  country. 
There  is  a  legal  requirement  of  reserve  to  be  held 
in  lawful  money.     The  country  banks  are  required 


110  FEDERAL   CLEARING  HOUSES 

to  hold  6  per  cent,  of  their  deposits  in  la\vful 
money  in  their  vaults.  Banks  in  reserve  cities  of 
the  second  class  are  required  to  reserve  12.1  per 
cent.,  and  banks  in  central  reserve  cities  25  per 
cent.  The  Western  banks,  the  outlying  banks, 
beyond  the  reach  of  our  money  centres,  hold  the 
largest  amount  of  cash  reserve.  In  Colorado,  Ne- 
vada, California,  and  Oregon  the  percentage  of 
reserve  held  to  deposits,  according  to  the  comp- 
troller's report  of  October  6,  1896,  was  29.2  per 
cent.  ;  the  amount  held  above  requirements  was 
therefore  23.2  per  cent. 

In  the  Eastern  States  of  Maine,  New  Hamp- 
shire, Vermont,  Massachusetts,  Rhode  Island,  and 
Connecticut  the  country  banks  held  10.7  per  cent, 
at  that  time,  having  a  surplus  of  only  4.7  per  cent, 
above  the  legal  requirements,  and  yet  they  held 
1162,000,000  of  deposits  against  143,000,000  of 
deposits  of  the  four  first-named  States,  and  the 
other  States  of  the  Union  are  classified  between 
those  two  extremes.  The  average  of  the  surplus 
reserves  of  the  total  banks  in  the  United  States 
above  the  legal  requirements  was  6.6  per  cent,  at 
the  time  named. 

Mr.  Newlands.  When  you  say  that  the  re- 
serves of  the  national  banks  are  inadequate,  do 
you  mean  the  legal  reserve  or  the  actual  reserves 
that  they  have  ? 

Mr.  Oilman.  I  refer  in  this  to  the  lawful 
money  reserve. 

Mr.  Spalding.     Kept  in  the  safe  ? 


HEARING  BEFORE  THE   COMMITTEE     111 

Mr.  GiLMAN.     Kept  in  the  safe. 

Mr.  Newlands.  Do  you  refer  to  the  amount 
required  by  law,  or  the  amount  that  they  actually 
keep  on  hand,  if  the  amount  actually  kept  on 
hand  is  in  excess  of  the  legal  requirement,  as  in- 
adequate ? 

Mr.  GiLMAN.     Both  are  inadequate. 

Mr.  Newlands.  I  understand  you  to  say  a 
withdrawal  of  6  per  cent,  of  the  reserves  of  banks 
for  hoarding  — 

The  Chairman.     Deposits,  you  mean  ? 

Mr.  GiLMAN.     Six  per  cent  of  deposits. 

Mr.  Newlands  (continuing).  Woidd  cause  a 
panic  ? 

Mr.  GiLMAN.  I  would  rather  put  it  in  this 
way  :  It  would  put  the  banks  in  a  position  where 
they  would  not  be  able  to  discount  or  afford  relief 
to  the  business  community,  and  they  would  be 
obliged  to  stop  discounting  and  to  call  in  loans  to 
repair  their  reserves. 

Mr.  Newlands.  About  what  are  the  total  de- 
posits in  the  banks  of  tliis  country  according  to 
your  understanding  ? 

The  Chairman.  Those  are  all  matters  of  sta- 
tistics. 

Mr.  Newlands.     I  know. 

Mr.  GiLMAN.  I  should  say,  according  to  the 
report  of  the  comptroller  of  the  currency  — 

The  Chairman.     What  date  ? 

Mr.  GiLMAN.  October  6,  1896.  There  are 
8208     commercial     banks,     including     national, 


112  FEDERAL   CLEARING  HOUSES 

state,  and  private  banks,  which  had  deposits  of 
ef2,553,000,000. 

Mr.  Newlands.     Those  are  national  banks  ? 

Mr.  GiLMAN.  National,  state,  and  private 
banks.  There  are  loan  and  trust  companies  and 
savings  banks  in  addition  to  that,  making  9456 
as  a  total  number  of  banks  reporting,  having  at 
that  time  15,075,000,000  of  deposits. 

Mr.  Newlands.  Now,  leaving  out  of  view  sav- 
ings banks  and  stating  it  in  round  numbers,  it 
would  be  about  14,000,000,000? 

Mr.  GiLMAN.  The  commercial  banks,  which 
are  the  ones  we  ought  to  specially  regard,  have 
12,553,000,000  of  deposits. 

Mr.  Newlands.  Then  6  per  cent,  of  that  would 
be  1150,000,000,  would  it  not? 

Mr.  GiLMAN.  One  hundred  and  fifty  million 
dollars. 

Mr.  Newlands.  A  withdrawal  of  1150,000,- 
000  of  deposits  from  the  banks  woidd  create  this 
condition  approaching  a  panic  ? 

Mr.  GiLMAN.  Under  the  strain  of  distress,  not 
under  the  ordinary  operations  of  business.  There 
is  a  distinction. 

Mr.  Newlands.  If  they  are  withdrawn  for  the 
purpose  of  hoarding,  do  you  not  think  a  panic 
would  be  produced  by  the  withdrawal  —  you  make 
the  distinction,  I  believe,  between  the  withdrawal 
of  deposits  and  redemption  of  the  cash  reserve  of 
banks,  do  you  not  ? 

Mr.  Gilman.    Yes.    A  closing  of  accounts  may 


HEARING  BEFORE  THE  COMMITTEE     113 

reduce  deposits  by  what  is  equivalent  to  journal 
entries,  without  payment  of  cash. 

Mr.  Newlands.  How  much  would  a  reduction 
of  $150,000,000  in  deposits  indicate  a  reduction 
in  the  cash  reserve  of  banks  ? 

Mr.  GiLMAN.  About  6  per  cent,  of  deposits, 
but  33  per  cent,  of  the  total  reserves. 

Mr.  Newlands.  If  the  deposits  were  reduced 
$150,000,000  in  all  the  banks  of  the  country, 
what  amount  of  coin  reserves  would  that  mean 
was  withdrawn  from  the  banks  or  lawful  money 
reserves  ? 

Mr.  Oilman.  That  would  be  determined  by 
the  nature  of  the  withdrawal.  If  there  were  sim- 
ple cross  entries  by  which  certain  accounts  were 
closed  out  on  one  side  and  certain  other  accounts 
were  closed  out  on  the  other,  it  might  not  require 
any  transfer  of  money  particularly  ;  but  if  that 
reduction  was  caused  by  the  demand  of  interior 
banks  to  strengthen  their  reserves  or  a  demand 
arising  from  merchants  who  desired  to  put  away 
money  in  their  safe-deposit  vaults  for  the  purpose 
of  providing  against  any  contingencies,  it  would 
be  an  entirely  different  matter,  and  6  per  cent,  of 
deposits  withdrawn  in  this  way  would  be  sufficient 
to  throw  the  whole  system  out  of  gear,  for  it 
would  be  equal  to  the  withdrawal  of  one  thud  of 
the  reserves. 

Mr.  Spalding.  New  York  went  through  some- 
thing like  that  about  two  months  ago. 

Mr.  Newlands.    Do  you  not  think  there  ought 


114  FEDERAL  CLEARING  HOUSES 

to  be  some  provision  requiring  a  larger  reserve  to 
be  kept  by  banks  ? 

Mr.  GiLMAN.  I  think  that  is  the  great  want  of 
the  country  at  the  present  time,  and  that  a  reserve 
can  be  provided  either  by  the  power  to  issue  a 
credit  currency  as  in  the  case  of  the  German 
banks,  which  does  not  cost  anything,  —  it  is  nothing 
but  the  legal  power,  —  or  it  can  be  provided  by  the 
actual  putting  up  the  money.  A  reserve  provided 
in  either  way  affords  ample  protection  to  the  credit 
system. 

The  Chairman.  Can  you  furnish  me,  and  if  so, 
will  you  do  so,  the  items  of  the  assets  and  liabili- 
ties of  the  Bank  of  France  anywhere  within  three 
or  four  months  after  the  occupation  of  Paris  by 
the  Germans? 

Mr.  GiLMAN.     I  will  endeavor  to  do  that. 

[Subsequently  Mr.  Gilman  furnished  the  follow- 
ing statement  concerning  the  Bank  of  France.] 

As  requested,  I  now  give  you  a  statement  of 
the  assets  and  liabilities  of  the  Bank  of  France 
under  three  dates,  June  30,  1870,  September  8, 
1870,  which  was  the  last  rendered  under  the  Em- 
pire, and  June  29,  1871,  which  was  the  fii-st  ren- 
dered under  the  Republic.  Also  to  assist  in 
understanding  same,  I  give  the  valuable  comments 
thereon  of  the  (London)  "  Economist  "  in  their 
issue  of  July  8,  1871. 


HEARING  BEFORE   THE  COMMITTEE     115 

Bank  of  France  Accounts 


June  30, 
1870. 

Sept.  8,  1870. 

June  29, 
1871. 

LIABILITIES. 

Capital 

Profits  and  reserve      .     . 
Notes  in  circulation  and 

drafts  on  provinces  .     . 
Public  deposits  .... 
Private  deposits      .     .     . 
Keserve    for    liquidation 

of  three  branches    . 

£7,300,000 
1,326,000 

59,588,000 

7,031,000 

17,864,000 

£7,300,000 
1,326,000 

73,193,000 

7,151,000 

18,820,000 

£7,300,000 
1,334,000 

89,985,000 

5,631,000 

22,246,000 

1,040,000 

. 

'     *     *     * 

Total 

93,109,000 

107,790,000 

127,536,000 

ASSETS. 

Cash  and  bullion     .     .     . 
Private  securities    .     .     . 
Postponed  bills  .... 

51,900,000 
30,315,000 

32,320,000 
64,250,000 

21.994,000 
21,4(52,000 
14,S55,000 

9,782,000 
47,720,000 

8,400,000 

3,324,000 

Government  securities 
Treasury  obliirations  . 

10,142,000 

10,142,000 

Advances  to  city  of  Paris 

Property    of    the    bank, 
sundries,  etc 

751,000 
93,108,000 

1,078,000 

Total 

107,790,000 

127,537,000 

THE  REMARKABLE  ACCOUNTS  OF  THE  BANK  OF 
FRANCE 

The  accounts  which  the  Bank  of  France  has  this 
week  again  for  the  first  time  since  September  be- 
gun to  publish,  are  perhaps  the  most  remarkable 
bank  accounts  which  have  appeared.  They  repre- 
sent the  effects  of  a  greater  destruction  in  the 
political  elements  of  credit  (taking  the  war  and 
the  civil  commotion  together)  than  have  ever  been 
known  since  banking  became  a  trade,  and  that 
effect  has  been  shown  by  the  accounts  of  a  bank 


116    FEDERAL   CLEARING  HOUSES 

much  larger  and  stronger  than  any  which  has  ever 
before  been  subjected  to  an  equal  or  an  analogous 
experience. 

The  most  important  fact  is  that  after  all  the  ca- 
lamities which  have  happened,  even  now  the  Bank 
of  France  cannot  be  said  to  stand  at  all  badly,  if 
we  take  due  account  of  its  peculiar  position  and 
circumstances.  Of  course  the  liabilities  of  a  bank 
which  has  been  required  by  its  government  to  sus- 
pend specie  payments,  and  which  pays  its  outgo- 
ings in  its  own  inconvertible  paper,  are  for  the 
present  only  nominal ;  they  would  only  become 
real  if  specie  payments  were  resumed.  But  if 
specie  payments  were  resumed  and  if  the  liabilities 
of  the  Bank  of  France  in  consequence  became  real, 
these  are  what  they  would  be :  — 

Notes  and  drafts  in  circulation     ....     £89,985,000 

Public  deposits 5,631,000 

Private  deposits 22,246,000 

Total 117,862,000 

and  the  reserve  would  be  nearly  £22,000,000,  or 
very  nearly  one  fifth.  And  this  is  really  a  very 
large  reserve  for  a  country  like  France  where 
banking  is  very  little  developed. 

It  is  certainly  a  much  larger  proportionate  re- 
serve than  exists  in  this  country  [England].  The 
peculiar  provision  of  Peel's  act,  which  separates 
the  banking  from  the  currency  reserve,  makes  a 
comparison  with  any  other  country  always  diffi- 
cult, smce  no  other  comitry  has  any  corresponding 
circulation.     But  if  we  take  the  banking  liabilities 


HEARING  BEFORE   THE  COMMITTEE     117 

of  six  joint-stock  banks  only,  and  remember  that 
the  reserves  of  notes  and  coin  in  the  Bank  of  Eng- 
land is  the  only  store  of  actual  cash  which  England 
possesses  to  meet  the  banking  liabilities  of  these 
banks  and  others,  we  find  :  — 

Banking  Liabilities  of  the  Bank  of  England  and  Six  London  Joint- 
stock  Banks,  December  31,  1870 
Bank  of  England : 

Public  deposits £6,286,000 

Private  deposits 20,283,000 

Seven-day  and  other  bills 750,000 

27,319,000 

London  and  Westminster  Bank      ....  22,869,000 

London  Joint  Stock  Bank 17,315,000 

Union  Bank 15,413,000 

London  and  County  Bank 16,506,000 

City  Bank 4,274,000 

Consolidated  Bank 2,496,000 

106,192,000 

And  the  reserve  of  notes  in  the  banking  depart- 
ment is  £12,574,000,  or  12  j^er  cent,  of  the  bank- 
ing liabilities.  Or  if  we  include  the  bank-note 
circulation  and  make  the  Bank  of  Ensfland  ac- 
coimts  up  into  the  "  old  form,"  as  it  has  now  for 
so  many  years  been  called,  the  account  is  — 

Liabilities,  including  Circulation  of  Bank  of  England 

Bank  of  England,  circulation  and  deposits    j£51, 512,000 

London  and  Westminster  Bank      ....  22,869,000 

London  Joint  Stock  Bank 17,315,000 

Union  Bank 15,413,000 

London  and  County  Bank 16,506,000 

City  Bank 4,274,000 

Consolidated  Bank 2,496,000 

Total 130,385,000 


118  FEDERAL   CLEARING  HOUSES 

and  coin  and  bullion  in  both  departments  is  <£22,- 
383,000,  or  17  per  cent,  of  the  entire  liabilities, 
whether  of  banking  or  of  circulation. 

In  both  cases,  when  we  include  only  six  joint- 
stock  banks,  we  find  that  the  ratio  of  the  English 
reserve  to  the  English  liabilities  is  less  than  that 
of  the  French  reserve  to  the  French  liability ;  and 
the  liabihties  of  these  six  banks  are  only  an  infini- 
tesimal small  part  of  the  liabilities  of  England. 
If  we  could  give  all  the  liabilities  of  the  private 
banks  —  all  the  liabilities  of  the  English  country 
bankers,  whether  on  deposits  or  circulation  —  and 
all  those  of  Irish  and  Scotch  bankers,  we  should 
have  a  most  formidable  total.  Broadly  speaking, 
the  reserve  in  the  Bank  of  England  is  the  only  re- 
serve (except  the  cash  in  the  till  and  the  compara- 
tively small  sums  kept  in  Scotland  and  Ireland  in 
conformity  with  the  Act  of  1845)  which  is  held 
arainst  it ;  but  the  French  liabilities  outside  of 
the  Bank  of  France  are,  in  comparison,  very  tri- 
fling, so  that  we  are  left  with  the  great  and  strange 
result  that  after  the  invasion  and  after  the  civil 
war  the  credit  system  of  France  rests  on  a  larger 
basis  of  cash  and  is  supported  by  a  far  larger  per- 
centage of  reserve  to  liabilities  than  our  English 
credit  system,  though  the  latter  is  in  its  ordinary 
state  and  has  not  been  tested  by  either  invasion  or 
internal  convulsion. 

The  principal  reason  of  the  remarkable  present 
strength  of  the  Bank  of  France  is  its  unparalleled 
strength  last  year.  At  that  time  its  liabilities 
were  — 


HEARING  BEFORE  THE  COMMITTEE     119 

Notes  and  drafts £59,588,000 

Public  deposits 7,031,000 

Private  deposits 17,864,000 

84,483,000 

and  its  bullion  and  specie  nearly  £52,000,000,  or 
62  per  cent,  of  its  liabilities.  Probably  never  since 
banking  lias  become  a  trade,  —  at  least  has  taken  its 
modern  form  of  a  receipt  of  deposits  and  an  issue 
of  promissory  paper,  —  has  any  banli  held  so  large 
a  proportion  of  cash  reserve  to  its  current  liabilities 
as  the  Bank  of  France  last  year  held.  Most  for- 
tunately these  strange  and  unprecedented  political 
calamities  attacked  the  bank  at  a  period  of  excep- 
tional strength,  and  therefore  it  has  been  able  to 
surmount  them  so  easily  and  to  stand  so  well  at 
last. 

The  next  most  remarkable  point  —  indeed,  in 
one  sense  the  most  remarkable  of  all,  for  it  is 
quite  new  and  has  never  been  stated  before  —  is 
that  the  advances  to  the  trading  community  of 
France  have  diminished.  In  September,  in  the 
last  account  which  was  published  till  now,  the 
discounts  had  risen  to  X64,000,000,  while  they 
are  now  £36,317,000,  showing  a  reduction  of 
nearly  half  since  September.  Nothing  can  speak 
more  conclusively  for  the  substantial  soundness, 
both  of  the  business  of  the  Bank  of  France  and 
of  French  commerce  in  general,  than  that  it 
should  have  been  possible  for  the  bank  to  obtain 
and  for  the  community  to  make  this  immense 
repayment. 


120  FEDERAL   CLEARING  HOUSES 

The  immense  augmentation  in  the  paper  circu- 
lation was  obvious,  was  known  before  the  publica- 
tion of  the  accounts,  and  has  therefore  been  much 
discussed.  There  is  an  important  point  on  which 
it  is  desirable  that  opinions  should  be  clear. 

As  yet  the  issue  of  bank  notes  by  the  Bank  of 
Trance  during  the  invasion  has  been  like  the  issue 
of  bank  notes  by  the  Bank  of  England  in  a  panic 
and  after  the  suspension  of  Peel's  act.  In  such 
cases  with  us  a  great  auxiliary  circulation  of 
checks  is  on  a  sudden  rendered  less  efficient  than 
usual,  and  requires  at  the  same  moment  a  greater 
support  of  bank  notes  or  coin  than  usual.  Con- 
sequently at  that  moment  of  fear  an  issue  of  bank 
notes  can  occur  without  depreciation.  Just  so  in 
France.  The  metallic  circulation  has  lately  been 
largely  hoarded,  and  therefore  the  paper  circula- 
tion is  needed  to  take  its  place,  and  has  taken  it 
without  being  depreciated.  But  soon  these  hoarded 
sums  of  metallic  money  will  come  forth  —  some 
are  now  being  sent  forth  on  account  of  the  loan 
—  and  it  is  not  very  easy  to  see  how,  if  the  me- 
talhc  money  comes  out,  the  paper  money  can  re- 
main as  large  as  it  is  without  falling  considerably 
in  value. 

The  enormous  augmentation  of  the  loan  by  the 
Bank  of  France  to  the  French  government  was  a 
necessity  in  their  position.  They  obtained  the 
means  to  make  it  partly  by  diminishing  their  bul- 
lion, but  mainly  by  an  augmentation  of  paper 
currency  which  they  could  not  have  obtained  with- 


HEARING  BEFORE   THE   COMMITTEE     121 

out  the  leave  of  tlie  government.  And  as  the 
government  gave  that  leave  they  were  right  to 
obtain  the  principal  benefit  from  it. 

The  Bank  of  France  is  an  institution  entirely 
opposed  to  all  English  ideas.  The  governor  and 
deputy  governor  are  appointed  by  the  state,  and 
they  are,  in  fact,  supreme  in  the  bank.  The 
intervention  of  the  executive  government  in  bank- 
ing is  opposed  to  established  opinion  and  to  sound 
political  economy;  but  this  much,  at  least,  may 
be  said  :  If  the  state  in  any  comitry  begins  to 
foster  banking  it  should  do  so  in  such  a  manner 
as  to  have  a  perfect  control  over  the  banking  which 
it  fosters. 

The  French  government  did  not,  like  the  gov- 
ernment of  India  with  the  old  Bombay  Bank,  give 
the  credit  of  its  sanction  to  a  bank  over  which  it 
had  no  control.  It  took  absolute  authority  over 
the  bank,  and  by  means  of  a  council  of  skilled 
regents  it  is  enabled  to  exercise  this  authority 
fairly.  This  may  not  be  as  good  as  a  system  in 
which  deposit  banking,  at  any  rate,  is  open  to  all 
the  world,  but  it  is  the  next  best  substitute  for  it. 
And  at  the  moment  of  this  disastrous  invasion  it 
has  enabled  the  state  and  the  bank  to  cooperate 
and  to  aid  one  another  in  a  singular  and  fehcitous 
manner. 

The  Chairman.  Can  you  give  me,  and  wiU 
you  do  so,  either  a  copy  of  or  information  as  to 
where  I  can  find  the   speech  of  Mr.  Goschen  in 


122  FEDERAL   CLEARING  HOUSES 

January,  1890  or  1891,  concerning  the  financial 
condition  of  tlie  Bank  of  England  ? 

Mr.  GiLMAN.  Yes;  Mr.  Goschen's  speech  is 
discussed  and  quoted  in  a  pamphlet  written  by 
S.  F.  Hopkinson,  the  Leeds  proposal  and  the 
answer  from  London. 

The  Chairman.  The  securities,  as  you  call 
them,  that  would  be  pledged  by  the  bank  to  the 
clearing  house  for  the  currency  that  the  clearing 
house  furnishes  the  bank  would  be  the  ordinary 
securities  or  notes  that  it  took  in  its  regular  way 
of  business  as  a  bank  ? 

Mr.  GiLMAN.     Yes,  sir. 

The  Chairman.  When  a  bank  issues  currency 
directly  against  its  assets,  as  is  done  in  France  and 
Germany  and  was  done  under  the  old  Suffolk 
system  and  under  the  old  state  bank  system,  it 
issues  it  against  these  very  securities  that  under 
your  system  it  issues  ? 

Mr.  GiLMAN.  Yes;  the  only  difference  being 
that  in  one  case  there  is  the  actual  pledge  of  the 
assets  in  the  hands  of  a  trustee  to  secure  the  clear- 
ing-house currency,  and  there  is  no  such  pledge 
when  the  notes  are  issued  against  the  assets  in 
their  own  hands.  In  France  the  privilege  of  note 
issue  is  given  to  one  bank,  and  in  Germany  to 
about  six.  To  give  the  same  privilege  in  our  coun- 
try to  three  thousand  banks  would  not  follow  their 
example,  and  would  invite  disaster.  Currency  was 
not  issued  under  the  Suffolk  system  ;  that  was 
only  a  method  of  redemption. 


HEARING  BEFORE   THE  COMMITTEE     123 

The  Chairman.  Then  the  only  difference  is  in 
the  distinction  and  positive  pledge  of  specific  assets 
of  a  bank  placed  in  the  hands  of  the  second  party, 
rather  than  the  whole  assets  of  the  banks  remain- 
ing in  the  hands  of  the  banks  as  against  the  notes 
it  issues  when  the  law  gives  a  first  lien  on  all  the 
assets  of  the  bank  and  its  stoekliolders  and  the 
liability  of  the  assessment  of  the  stockholders  as 
security  for  the  currency  ? 

Mr.  GiLMAN.  Yes  ;  that  is  the  difference,  and 
the  liability  to  a  lack  of  confidence.  I  wiU  say 
the  confidence  comes  in  just  at  that  j^oint.  This 
describes  the  method.  The  object  is  to  make  the 
banks  sustain  their  customers  as  well  as  derive  a 
profit  from  them.  This  they  do  by  turning  to  the 
clearing  house  to  find  the  remedy  for  a  bank  crisis, 
instead  of  throwing  the  whole  pressure  on  the  mer- 
cantile community,  to  use  the  words  of  Nathan 
Appleton.  The  result  is  that  cooperation  is  thus 
established,  which  prevents  the  interests  of  the 
banks  from  being:  at  variance  with  the  interests  of 
the  people.  A  secured  currency  with  a  coopera- 
tive system  will  produce  stability,  and  an  unse- 
cured currency,  whether  under  the  Suffolk  system 
or  any  other,  will  produce  panics. 

Thereupon  the  committee  adjourned. 


124  FEDERAL   CLEARING  HOUSES 

THE  LEEDS  PROPOSALS 

SPEECH  ON  ENGLISH  BANK  RESERVES 

By  Mr.  Goschen,  Chancellor  of  the  Exchequer,  at 
Leeds,  January  28,  1891  ^ 

Mk.  President  and  Gentlemen,  —  I  thank 
you  most  cordially  for  the  magnificent  hospitality 
which  you  have  extended  to  me  to-night,  and  for 
the  warm  welcome  which  you  have  given  me.  I 
have  to  thank  the  president  for  a  most  genial 
speech.     [Hear,  hear.] 

Gentlemen,  you  have  given  me  a  cordial  wel- 
come, and  we  are  now  at  an  hour  when  generally 
genial  after-dinner  influences  forbid  the  intro- 
duction of  heavy  or  serious  topics  [laughter]  ; 
and  it  goes  against  the  grain  that  I  shoidd  have 
to  requite  your  kindness  by  inflicting  upon  you  a 
harangue  upon  some  very  serious  aspects  of  our 
national,  connnercial  and  manufacturing  life.  I 
am  anxious  to  speak  to  you  upon  a  matter  which 
cannot  fail  to  be  interesting  to  every  man  who  is 
engaged  in  commerce  and  in  trade,  and  that  is 
upon  the  facilities  of  banking,  upon  the  question 
of  currency,  upon  the  question  of  the  attitude  of 

1  From  the  London  Times  of  January  29,  189L  This  speech 
of  Mr.  Gosehen's  is  here  given,  not  only  because  it  was  asked  for 
by  the  chairman  of  the  Committee  on  Banking-  and  Currency  of 
the  House  of  Representatives,  but  because  it  marks  the  beginning 
of  a  change  in  English  banking  methods,  and  is  an  admirable 
discussion  of  the  subject  of  bank  reserves,  and  is  not  easily 
accessible  to  the  general  reader.  Parts  not  essential  to  this  argu- 
ment have  been  omitted. 


HEARING  BEFORE   THE  COMMITTEE     125 

this  country  with  regard  to  its  enormous  liabili- 
ties, and  the  means  with  which  it  has  to  discharge 
those  liabilities  in  a  manner  which  shall  redound 
to  the  credit  of  this  country,  and  wliich  may  assist 
us  in  maintaining  the  splendid  fabric  of  credit 
which  has  done  so  much  to  promote  the  prosperity 
of  the  people  and  has  commanded  the  admiration 
of  Europe  and  of  America. 

THE   BARING    CRISIS 

Your  president  has  alluded  to  the  times  through 
which  we  have  passed.  He  has  alluded  to  the 
state  of  things  which  in  the  months  of  November 
and  December  [1890]  alarmed  the  country  and 
created  a  feeling  of  tension  such  as  has  rarely  been 
witnessed.  [Cheers.]  No  fertile  imagination  could 
exaggerate  the  gravity  of  the  crisis,  and  if  I 
attempt  to  bring  home  to  those  who  are  listening 
to  me  now  the  serious  nature  of  the  crisis,  I  do  so 
in  order  to  accentuate  the  necessity  of  their  turn- 
ing their  attention  to  what  I  may  call  the  necessity 
for  soundness  in  our  bankino-  and  soundness  in  our 
currency  transactions.  [Cheers.]  I  doubt  whether 
the  public  has  thorouglily  realized  the  extent  of 
the  danger  to  which  what  is  called  the  banking 
crisis  exposed  us  all.  It  was  not  a  question  of  a 
narrow  circle  of  financiers  or  traders.  The  liabili- 
ties were  so  gigantic,  the  position  of  the  house  was 
so  unique,  that  interests  were  at  stake  far  beyond 
individual  fortunes,  far  beyond  the  fortunes  of 
any   class.     We   were   on   the  brink  of  a   crisis 


126  FEDERAL   CLEARING  HOUSES 

through  which  it  might  have  been  difficult  for  the 
soundest  to  pass  unscathed,  for  the  wealthiest  to 
have  escaped.  It  was  a  time  when  none  who  had 
liabilities  or  engagements  to  pay  could  say  how 
they  could  pay  them  if  a  condition  of  things  were 
to  continue  under  which  securities  coidd  not  be 
realized,  mider  which  produce  coidd  not  be  sold, 
under  which  biUs  could  not  be  discounted,  under 
which  there  appeared  an  absence  of  cash  sufficient 
to  discharge  the  liabihties  of  the  general  public. 
[Hear,  hear.] 

That  was  the  position  at  home,  and  I  tell  you 
what  was  at  stake  —  you  risked  the  position  of 
London  as  the  banking  centre  of  the  universe. 
You  risked  the  supremacy  of  English  credit,  you 
risked  the  transfer  of  the  business  of  this  country 
to  other  European  centres,  if  such  a  catastrophe 
had  occurred  as  you  were  on  the  eve  of  witness- 
ing. I  cannot  exaggerate  the  danger,  the  inune- 
diate  danger  to  which  tliis  country  was  exposed 
at  that  time,  and  we  are  under  a  deep  debt  of 
gratitude  to  the  Bank  of  England  [cheers],  and 
to  the  Bank  of  England  for  the  position  wliich 
it  took  up  which  enabled  us  to  tide  over  that 
crisis.  I  want  to  bring  home  to  you  here  and 
to  the  public  who  are  not  in  London,  but  in  the 
various  mercantile  and  producing  parts  of  the 
country,  that  this  was  not  only  a  banking  danger. 
You  Ivnow  what  it  would  have  been  if  banks  who 
hold  your  deposits,  banks  on  whom  you  depended 
for  your   discounts,  banks   who    supplied  to  you 


HEARING  BEFORE   THE  COMMITTEE     127 

the   means  of    carrying    on  that  active  trade  for 
which  this    town  is  renowned  —  you  would  l\ave 
known  it  if  these  banks  had  been   crippled,  and 
crippled  they  would  have  been  if  that  crisis  had 
not  been  prevented.     But  beyond  that  the  country 
should  understand  that  it  is  through  credit  that 
the  crops  are  moved  —  all  those  raw  materials  on 
which  the  life  of  this  country  depends.     What  is 
the  ordinary  means  of  sending  cotton  to  this  coun- 
try?    By   bills    on    London  houses.     But  to  sell 
those  bills  you  must  have  buyers,  and  for  buyers 
you   must  have  men  who  have  confidence  in  the 
credit  and  solvency  of  London  firms,  and  if  that 
had  been  absent,  how  would  you  have  been  able 
to  move  produce  from  various  countries  to  this  ? 
Simply  by  shipments  of    gold,  and  by  no  other 
means.     Yes,  you  had  securities,  but  who  would 
buy  them  at  that  time,  when  men  were  unable  to 
realize  their  assets,  wishing  to  sell  what  they  con- 
sidered their  wealth,  but  unable  to  utilize  for  the 
payment  of  their  liabilities?     And  men  trembled 
for  their  honor,  they  trembled  for  the  name  they 
had  built  up  through  scores  of  years ;  and  they  did 
not  see  how  through  the  dangers  which  were  sur- 
rounding them  they  were  to  be  able  to  maintain 
their  own  personal  name,  and  how  the  names  of 
great  houses  in  this  country  would  be  able  to  stand 
the  crisis. 


128  FEDERAL   CLEARING  HOUSES 

THE    MEASURES    TAKEN    TO    SAVE    THE    SITUATION 

Gentlemen,  I  tell  you  you  have  escaped  from  a 
catastrophe  to  which  the  famous  catastrophe  of 
Overend  and  Gurney  would  have  been  child's 
play.  [Cheers.]  You  have  escaped  from  a  cata- 
strophe which  would  have  affected  every  town  in 
this  country,  which  woidd  have  affected  every  in- 
dustry ;  to  use  a  common  phrase,  you  have  es- 
caped "by  the  skin  of  your  teeth."  [Cheers.] 
Well,  gentlemen,  I  ask  you  what  were  the  mea- 
sures taken  ;  and  mind  I  wish  you  to  understand 
this,  if  I  place  before  you  —  if  I  may  use  the 
phrase  in  its  most  hideous  features  —  the  dangers 
to  which  this  country  was  exposed,  I  do  so  in  order 
that  we  may  see  what  was  wrong  and  consider 
whether  by  prudent  courses  such  a  danger  may 
never  again  be  incurred.  [Cheers.]  Well,  what 
saved  the  situation  in  one  sense  —  in  a  narrow 
sense  ?  I  have  told  you  it  was  saved  in  part  by 
the  capacity  of  those  who  were  governing  the 
Bank  of  England  at  the  time.  What  measures 
were  taken?  They  brought  from  France  three 
milHons  of  gold ;  they  brought  from  Eussia  a  mil- 
lion and  a  half  of  gold ;  knowing  the  panic  that 
mio'ht  ensue,  knowino'  the  rush  that  there  would 
be  on  the  reserve  of  the  Bank  of  England,  they 
took  a  preliminary  precaution  by  extraordinary 
means,  —  for  ordinary  means  would  not  have  suf- 
ficed, —  they  took  the  extraordinary  means  of 
drawing  to  this  country  four  millions  and  a  half 


HEARING  BEFORE  THE  COMMITTEE     129 

of  gold,  or  I  might  say  five  millions,  as  other  mea^ 
sures  were  also  taken.  For  that  we  depended  in 
part  on  the  good-will  of  the  authorities  of  the 
Bank  of  France. 

Paris  was  interested  in  saving  the  situation. 
Let  there  be  no  mistake  about  that.  A  crisis  such 
as  mijrlit  have  occurred  in  London  could  not  have 
failed  to  have  its  coimterpart  in  Paris  and  Berlin, 
and  Paris  would  have  suffered  grievously  if  the 
catastrophe  had  not  been  avoided.  But,  neverthe- 
less, the  Bank  of  France  acted  with  promptness  and 
with  courtesy,  and  the  three  millions  of  gold  came 
from  the  Bank  of  France  to  the  Bank  of  England, 
and  were  an  element  of  streng-th  at  an  important 
moment.  [Cheers.]  At  the  same  time,  there 
were  some  who  considered  that  there  must  have 
been  something  wrong  in  the  situation  that  it 
should  have  been  necessary  for  this  country,  with 
its  immense  wealth,  to  have  recourse  to  foreign 
aid  on  such  an  occasion  as  this.  [Hear,  hear.] 
Well,  the  Bank  of  England  strengihened  its  re- 
sources, and,  calling  together  the  great  banking 
institutions  of  this  country,  it  secured  a  guarantee 
which  saved  that  credit  which  it  was  so  essential 
to  save  at  that  moment,  —  not  the  credit  of  the 
house,  but  the  credit  of  London,  the  credit  of 
England,  and  I  rejoice  to  think  that  the  credit 
was  saved  not  by  the  action  of  the  government, 
but  that  it  was  saved  by  the  spontaneous  efforts  of 
the  banking  classes  themselves.    [Cheers.] 

There  were  not  wanting  voices  who  gave  utter- 


130  FEDERAL   CLEARING  HOUSES 

ance  to  the  view  that  it  was  the  duty  of  the  gov- 
ernment on  such  an  occasion  to  intervene,  but  it 
woukl  have  been  a  disaster.  I  should  have  been 
sorry  to  have  had  to  come  forward  in  the  House 
of  Commons,  and  to  say  that  two  or  three  years 
ago  in  Paris,  when  there  was  a  panic  tlu'ough  the 
breakdown  of  a  great  institution,  the  great  firms 
and  banks  of  Paris  came  together  and  saved  the 
situation,  but  here  in  London  it  had  been  neces- 
sary to  invoke  the  action  of  the  government.  I 
should  have  been  ashamed  if  there  had  not  been 
sufficient  patriotism,  sufficient  pubHc  spirit,  and 
sufficient  gold  in  the  financial  institutions  of  this 
country  to  meet  such  a  thing.      [Cheers.] 

What  you  want  on  these  occasions  is  a  leader ;  you 
w^ant  a  man.  You  want  a  man  to  come  forward  and 
say,  "  You  all  must  do  your  duty."  There  was  a 
temptation  on  the  part  of  the  banks,  each  one,  to 
look  to  itself  and  to  aggravate  the  crisis  by  calling 
in  all  its  money,  by  refusing  accommodation  to 
customers,  and  in  that  way  intensifying  the  feeling 
of  anxiety  which  existed.  There  were  moments 
when  that  was  apprehended,  but  that  movement 
vanished  in  a  day ;  it  vanished  when  it  was  power- 
fully put  to  the  great  institutions  of  this  country, 
—  *'  Here  is  an  occasion  when,  putting  aside  any 
timid  counsel,  you  must  come  forward  to  endeavor 
to  rescue  the  credit  of  London,  not  only  to  save  a 
firm,  but  to  save  the  supremacy  of  British  credit." 


HEARING  BEFORE  THE  COMMITTEE     131 
CASH   AND   CREDIT 

Well,  gentlemen,  it  was  done  and  the  situation 
was  saved.  I  have  shown  you  how  we  got  out  of 
the  difficulty.  Two  things  were  necessary :  you 
had  to  find  cash,  you  had  to  find  gold,  and  you 
had  to  restore  the  credit.  The  gold  was  found ; 
the  reserve  was  increased  by  the  efforts  of  the 
Bank  of  England,  and  the  credit  was  saved  by  the 
action,  the  joint  action  of  the  great  banking  insti- 
tutions of  this  country.  But  now,  when  the  crisis 
was  over,  men  began  to  say,  "  Why  should  we 
ever  have  got  into  this  difficulty  ?  "  [Hear,  hear.] 
Some  said,  "  Oh,  it  is  the  fault  of  the  Bank 
Charter  Act."  Others  said  the  capital  of  the 
Bank  of  England  was  msufficient,  and  others 
said  that  there  was  not  sufficient  elasticity  in 
our  currency  system  —  which  means  to  say  that 
the  printing-office  for  printing  bank  notes  is  not 
put  into  sufficient  activity  in  dangerous  times. 
[Laughter.]  Well,  you,  as  men  of  business,  I 
hope  will  understand  that  what  is  necessary  to  get 
men  out  of  a  difficulty  when  they  have  undertaken 
more  liabilities  than  they  can  meet  is  to  have 
cash.     It  is  cash  that  is  wanted. 

In  foreign  liabilities  —  and  on  this  occasion 
foreign  liabilities  were  enormous,  not  only  foreign 
liabilities  of  one  firm,  but  the  foreign  liabilities  of 
the  nation  —  on  these  occasions  bank  notes  are 
of  no  sufficient  avail.  What  you  want  is  cash  — 
gold   which   wiU   pay  your   liabilities  in   foreign 


132  FEDERAL   CLEARING  HOUSES 

countries  ;  and  the  printing  press  at  a  moment  of 
this  kind  is  a  danger,  and  not  a  resource.  And 
that  is  what  I  want  to  bring  home,  if  I  can,  to  the 
pubHc  of  this  country,  —  that  they  will  lean  upon 
a  reed  which  will  break  in  their  grasp,  that  they 
will  be  encouraging  the  most  dangerous  of  ideas, 
if  they  think  that  any  elasticity  or  increase  in  the 
currency  or  any  measure  of  this  kind  would  have 
saved  them  from  such  a  danger  as  that  to  which 
they  were  lately  exposed.      [Hear,  hear.] 

Why,  what  do  you  want  at  such  a  moment? 
You  want  men  who  have  ready  cash  with  which 
they  can  step  into  the  breach.  You  do  not  want 
institutions  who  have  at  the  moment  simply  to 
realize  everything  they  have  got  in  order  to  meet 
their  own  enormous  liabilities  ;  but  you  want  some 
reserve  that  may  come  to  the  assistance  of  the 
community  at  large,  and,  stepping  in,  may  assist 
those  who  have  possibly  overtraded,  by  purchasing 
a  portion  of  their  securities  and  taking  over  a  por- 
tion of  their  assets.  But  that  was  not  the  case  on 
the  late  occasion.  What  was  developed  was  this, 
to  my  mind,  —  that  there  were  not  sufficient  bank- 
ing reserves  in  the  comitry  at  that  moment,  and 
on  that,  if  you  will  permit  me,  I  wish  presently  to 
say  another  word  or  two  of  warning. 

THE    QUESTION    OF    GOLD 

But  I  have  spoken  on  the  question  of  gold. 
Let  it  be  thorougiily  understood  that  in  this  coun- 
try our  liabilities  are  to  pay  in  gold.     That  is  all 


HEARING  BEFORE   THE  COMMITTEE     133 

the  liability  which  we  have  undertaken  to  foreign 
countries  ;  it  is  a  liability  which  the  Bank  of  Eng- 
land undertakes  to  all  who  hold  its  notes.  It  is  a 
truism  to  say  so  in  a  com]3any  such  as  this  is,  but  it 
is  one  of  those  truisms  which,  hke  other  truisms, 
are  sometimes  buried  in  the  memory  of  men  who 
do  not  like  those  truisms.      [Laughter.] 

And  here  is  the  position  —  that  the  very  centre 
on  which  the  pull  comes  has  an  infinitely  smaller 
stock  of  that  metal  than  any  of  the  other  countries 
who  are  in  the  same  position.  [Cheers.]  For  good 
or  evil,  the  immense  liabilities  of  this  coimtry  would 
have  to  be  discharged,  if  need  there  were,  in  gold ; 
and  this  comitry  is  that  on  which  if  three  or  four 
millions  are  wanted,  the  immediate  pull  comes  in  the 
fii'st  instance.  We  have  got  a  very  small  available 
stock  ready  for  the  moment,  and  hence  arise  sud- 
den changes  in  the  value  of  money.  If  you  have  so 
small  a  stock  of  bidlion  and  so  smaU  a  reserve  — 
and  on  that  I  will  say  something  in  a  moment 
—  if  you  have  so  small  a  reserve,  it  follows  that 
any  large  amount  or  any  comparatively  small 
amount  withdrawn  from  such  a  comparatively  nar- 
row base  for  carrying  so  enormous  a  j)yramid,  — 
these  withdrawals  have  an  effect  which  is  dispro- 
portionate to  the  extent  to  which  the  gold  is  with- 
drawn or  reserves  diminished. 

I  tell  you,  not  only  as  viewing  the  matter 
from  the  point  of  view  of  currency,  not  only 
from  the  point  of  view  of  one  who  has  had  some 
acquaintance  with  banking  matters,  but  as  one  who 


134  FEDERAL   CLEARING  HOUSES 

is  responsible  to  others  for  the  safety  of  the  coun- 
try, I  consider  that,  looking  to  the  fearful  national 
emergencies  which  might  come  —  but  which,  please 
God  will  not  come,  but  which  every  statesman  is 
bound  to  consider  as  possible  —  that  the  amount 
of  central  gold  in  the  possession  of  this  country, 
compared  to  the  enormous  amount  at  the  disposal 
of  other  countries,  is  a  matter  which  requires  the 
attention  of  statesmen,  and  is  one  to  which  we 
ought  to  look  with  some  anxiety,  not  overweening 
anxiety,  but  we  ought  to  see  whether  we  cannot 
contrive  some  methods  by  which  we  can  alleviate 
special  emergencies,  and  at  the  same  time  hold  a 
large  stock  of  bullion  in  reserve,  not  only  for 
the  banker,  but  for  every  possible  emergency. 
That  is  the  point  upon  which  I  wish  to  put  in 
a  word  of  warning.  I  will  not  be  a  party  to  the 
expulsion  of  gold  from  tliis  country  by  any  ex- 
cessive issue  of  any  fiduciary  currency  whatever. 
[Cheers.]  If  there  is  to  be  an  increase  of  fidu- 
ciary issue  I  will  endeavor  to  make  it  subservient 
to  what  I  consider  to  be  the  primary  point  of 
being  stronger,  both  for  banking  and  for  national 
purposes.  For  that  object,  and  for  that  object 
alone,  would  I  embark  in  any  scheme  such  as  the 
XI  note.  I  have  spoken  at  some  length,  I  am 
afraid.  [Cries  of  "  Go  on."]  I  have  spoken  with 
regard  to  gold. 


HEARING    BEFORE   THE  COMMITTEE     135 
THE    CASH    RESERVES    OF   ENGLAND 

I  come  now  to  a  point  of  scarcely  less  interest, 
and  tliat  is  the  cash  reserves  of  the  conntry,  apart 
from  the  question  of  gold  ;  and  there  I  must  give 
utterance  to  a  strong  conviction  which  I  hold,  that 
the  banking  reserves  of  the  country  are  inade- 
quate to  the  necessities  of  the  comitry,  and  are  too 
small  as  compared  with  the  gigantic  liabilities 
which  our  large  institutions  have  incurred.  On 
that  point  I  should  wish  to  put  a  figure  or  two 
before  you.  They  are  stupendous  figures.  I  wish 
to  put  this  argument  before  you,  —  that  in  times 
of  crises  reserves  are  essential,  and  that  it  is  of 
supreme  importance  that  all  the  great  banks  of  the 
country,  at  the  moment  when  a  crisis  comes,  should 
be  able  to  afford  relief  to  their  customers  rather 
than  feel  at  that  moment  bound  to  curtail  the  facil- 
ities which  they  are  giving. 

It  is  all  very  well  for  banks  to  give  facilities  to 
their  customers  in  good  times,  but  a  customer 
looks  to  the  bank  for  facilities  when  the  pinch 
comes,  and  if,  when  the  pinch  comes,  the  bank 
itself  is  obliged  to  draw  in  its  resources,  call  in 
money,  it  disturbs  the  whole  of  the  mercantile 
arrangements,  and  the  bank  is  not  really  assisting 
the  country,  but  is  thwarting  the  best  interests  of 
the  banking  and  trading  communities.      [Cheers.] 

Listen  to  the  fig-ures.  The  "  Economist "  estimates 
the  total  deposits  on  current  account  held  by  all  the 
banks  in  the  United  Kingdom,  excluding  the  Bank 


136  FEDERAL   CLEARING  HOUSES 

of  England,  in  July,  1880,  at  from  £470,000,000 
to  £480,000,000;  and  in  July,  1890,  at  from 
£600,000,000  to  £620,000,000,  — an  increase  in 
those  ten  years  of  £130,000,000.  I  cannot  tell 
you,  because  I  liave  not  got  tlie  materials 'at  my 
command,  to  what  extent  they  increased  their  re- 
serve in  cash  in  proportion  to  the  enormous  in- 
crease in  their  liabilities ;  but  I  can  give  you  some 
indication  by  the  published  accounts  of  some  of  the 
largest  bankers.  According  to  the  ''Economist," 
again,  the  liabilities  of  all  large  banks  were,  in 
1879,  £126,000,000,  while  their  cash  in  hand  or 
at  the  Bank  of  England  amounted  to  £16,200,000; 
in  1889  the  liabilities  had  risen  to  nearly  £170,- 
000,000,  during  those  eleven  years  an  increase  of 
£44,000,000.  But  the  cash  balances  had  risen  in 
the  same  time  only  to  £17,500,000,  an  increase  of 
£1,300,000.     Observe  the  operation  —  £45,000,- 

000  increase  in  liabilities  to  depositors  ;  increase 
in  cash  reserve  to  meet  them,  £1,300,000.    I  hope 

1  shall  not  give  offense,  but  I  say  I  do  not  consider 
that  a  perfectly  satisfactory  position.  [Cheers.] 
On  further  examination  I  find  the  proportion  of 
cash  to  liabilities  had  fallen  during  the  ten  year* 
from  12.9  to  10.3,  a  decrease  of  2.6  on  12.9,  which 
is  about  one  fifth  of  the  whole  reserve. 

During  these  ten  years  the  change  is  that  you 
have  only  four  fifths  of  the  reserve,  instead  of  the 
five  fifths  you  had  before  ;  and  in  the  case  of  one 
bank  the  percentage  of  cash  to  liabilities  had  sunk 
from  nearly  22  per  cent,  to  12  per  cent.,  and,  in 


HEARING  BEFORE   THE  COMMITTEE     137 

another  case,  where  the  percentages  had  fallen 
from  10  per  cent,  to  a  little  over  6  per  cent.,  the 
cash  balance  against  the  total  liabilities  of  £9,000,- 
000  was  less  than  £600,000.  A  good  deal  of 
public  attention  has  been  called  to  these  facts.  It 
has  been  shown  that  while  the  liabilities  to  the 
public  have  enormously  increased,  the  reserve  has 
actually  fallen. 

The  reserve,  let  me  make  you  clearly  under- 
stand, is  cash  in  the  till,  or  cash  at  the  Bank  of 
England.  Some  banks  include  cash  on  call,  but 
cash  on  call  is  no  reserve  in  the  general  sense 
so  far  as  the  community  is  concerned,  because 
it  means  when  you  call  in  your  money  on  call 
that  you  are  unbalancing  another  person,  while 
you  may  be  relieving  yourself.  Let  the  public 
understand  this,  —  there  is  only  a  limited  amount 
of  money  so  unemployed.  If  everybody  employs 
money  up  to  the  hilt  there  will  be  no  unem- 
ployed money  to  come  to  the  rescue  in  time  of 
crisis.  If  you  employ  the  money  by  lending  it  to 
another  person  you  lend  it  to  a  broker.  That 
broker  cannot  find  the  money  except  by  going 
^somewhere  else.  He  goes  somewhere  else,  and 
the  whole  in  the  end  concentrates  itself  upon  the 
Bank  of  England,  and  there  is  no  reserve  to  a 
bank  in  having  money  on  call  in  the  sense  in 
which  I  am  now  discussing  reserves.  It  is  a  valu- 
able asset,  but  it  is  not  an  asset  which  consists  in 
a  reserve  useful  to  the  general  interests  of  the 
community  at  large. 


138  FEDERAL  CLEARING  HOUSES 

THE  BANK  OF  ENGLAND  AND  OTHER  BANKS 

Now  the  banks,  I  believe,  have  taken  up  this 
position  ;  viz.,  that  it  is  not  good  to  hokt  large 
reserves,  and  that  they  have  simply  to  put  their 
money  into  the  Bank  of  England,  and  that  the 
Bank  of  England  would  then  make  interest  upon 
that  money.  Look  upon  the  crisis.  What  was 
the  establislmient  upon  which  the  whole  commu- 
nity relied  when  the  time  of  crisis  came  ?  It  was 
the  Bank  of  England,  and  the  bankers  themselves 
had  to  strengthen  their  reserves  at  the  Bank  of 
England,  and  were  not  able  to  bring  that  general 
alleviation  to  the  conmiunity  at  large  which  was 
extended  by  the  Bank  of  England. 

I  am  most  anxious  to  avoid  saying  anything 
which  may  reflect  upon  our  great  banking  institu- 
tions. They  have  done  immense  service  to  the 
country.  They  have  brought  together  in  their 
deposits  capital,  which,  being  lent  out  again,  has 
had  fertilizing  influences,  and  has  assisted  the 
commerce  and  industry  of  this  country.  [Cheers.] 
I  say  nothing  against  them.  But  I  say  it  is  a 
false  system  and  a  dangerous  system  to  rely  simply 
upon  the  aid  the  Bank  of  England  can  give  in  a 
crisis,  and  to  tajsie  no  thought  whatever  to  meet 
the  difficulties  which  might  arise,  except  by  such 
action  as  the  Bank  of  England  may  possibly  take, 
as  they  think,  with  the  government  behind  the 
Bank  of  England.  I  should  be  glad  to  be  able  to 
devise  some  system,  and  I  am  engaged,  and  hope- 


HEARING  BEFORE   THE   COMMITTEE     139 

fully  engaged,  witli  the  assistance  of  tlie  authori- 
ties of  the  Bank  of  England,  in  devising  a  scheme 
by  which  we  may  strengthen  the  permanent  re- 
serves of  this  country,  by  which  we  may  give 
greater  help  in  emergencies,  and  by  which  we 
hope  that  some  of  those  fearfid  catastrophes  which 
have  sometimes  threatened  the  commerce  of  this 
country  may  be  avoided.  [Cheers.]  I  am  en- 
gaged on  plans  of  that  kind,  and  I  trust  I  may  be 
able  to  give  effect  to  them.  But  we  shall  only 
aggravate,  we  shall  not  alleviate,  the  position  if 
any  rehef  given  in  the  hope  of  a  second  reserve, 
besides  the  first  reserve,  should  have  the  effect  of 
inducing  the  joint-stock  bankers  to  trade  further 
up  to  the  hilt  than  they  have  hitherto ;  if  we 
should  encourage  the  belief  that  there  is  safety  at 
the  centre,  and  therefore  that  to  any  extent  we 
may  invest  our  deposits,  and  that  we  may  rely, 
instead  of  holding  our  own  reserves,  on  the  action 
of  the  Bank  of  England  and  the  government. 

Unless  I  saw  some  disposition  on  the  part  of 
the  bankers  of  this  country  to  take  their  share  in 
any  reforms  that  may  be  necessary,  unless  I  saw 
a  disposition  to  assure  us  that  this  country  is  not 
again  to  be  at  the  mercy  of  foreign  countries  — 
that  we  are  not  to  be  obliged  to  import  gold  from 
abroad,  that  we  should  not  be  at  the  mercy  of  such 
circumstances  as  have  lately  occurred  —  I  say  that 
the  great  banking  institutions  of  this  country  are 
bound  to  take  their  share  in  endeavoring  to  bring 
about  such  a  result.      [Cheers.] 


140  FEDERAL  CLEARING  HOUSES 

Gentlemen,  the  public  lias  some  locus  standi  in 
this  matter.  The  position  in  former  times  was 
this,  that  the  Bank  of  England  was  an  institution 
so  vastly  greater  than  all  the  others  that  it  was 
able  to  command  the  money  market  and  impose  its 
terms.  Those  times  have  changed.  There  are 
two  banks  who  hold  between  them  £80,000,000 
of  deposits  against  the  X34,000,000  deposits  of 
th*e  Bank  of  England.  The  position  of  the 
Bank  of  England  is  changed  in  that  respect.  It 
has  still  the  duty  of  endeavoring  to  meet  all  the 
necessities  of  a  crisis  ;  it  still  fills  such  a  position 
that  the  whole  of  the  country  looks  to  it  to  extri- 
cate it  from  a  difficulty,  but  it  does  not  command 
any  longer  the  same  proportionate  resources  which 
it  commanded  in  the  old  times.  It  is  imable  at 
this  moment,  in  the  face  of  this  £600,000,000  of 
deposits  intrusted  to  other  banks,  to  take  the  same 
position  as  in  times  past. 

THE   RESERVES   OF   JOINT-STOCK   BANKS 

Now,  in  America  there  is  a  limitation  imposed 
upon  private  bankers  which  is  of  a  very  remarka- 
ble character.  The  national  banks  are  obliged  to 
hold  twenty-five  per  cent,  in  reserve  against  their 
deposits.  Those  are  the  issuing  banks,  it  is  true, 
but  the  state  has  considered  that  it  is  so  important 
that  those  banks  shall  meet  all  their  liabilities  that 
it  has  imposed  an  iron  limit  of  twenty-five  per  cent, 
in  reserve  against  their  deposits.  I  am  bound  to 
say  that  I  should  never  propose  to  impose  such  an 


HEARING  BEFORE   THE  COMMITTEE     141 

iron  system  upon  the  great  banking  institutions  of 
this  country ;  but  I  mention  it  to  show  what  in  a 
free  country  such  as  America  they  do.  The  ques- 
tion of  the  proportion  of  deposits  to  liabihties  was 
so  serious  that  they  introduced  a  cast-iron  system. 
Then  there  were  other  suggestions,  that  if  there 
were  an  excess  of  deposits  and  liabilities,  up  be- 
yond a  certain  line,  then  that  should  be  done 
which  is  done  in  some  foreign  lands,  —  they  should 
have  to  pay  a  certain  tax  upon  the  excess  of  their 
dej)osits. 

I  will  not  say  what  view  I  hold  upon  such  a 
suggestion,  but  in  the  most  friendly  spirit  I 
would  indicate  to  the  banks  of  this  country  that 
the  public  have  an  enormous  interest  in  the  pro- 
portion of  the  reserve  which  they  hold  to  deposits. 
They  all  hold  together  ;  and  you  have  this  re- 
markable fact,  that  the  soundest  and  strongest 
banks  may  be  making  the  smallest  dividends, 
whilst  the  more  imprudent  banks,  who  invest  the 
depositors'  money,  leaving  a  small  reserve,  are 
able  to  show  much  larger  dividends  to  their  share- 
holders. Why  are  the  latter  able  to  take  this 
course  ?  Because  they  may  have  the  conviction 
that  the  failure  of  any  one  of  these  big  banks 
would  be  such  a  disaster  to  the  whole  community 
that  the  other  banks  would  be  compelled  to  come 
to  their  assistance,  and  to  rescue  the  offending 
banks  from  the  consequence  of  its  offenses  by 
themselves  undertaking  a  part  of  their  liabilities. 
The  more  imprudent  banks  will  say,  "  There  is  no 


142  FEDERAL   CLEARING  HOUSES 

imprudence.  We  shall  never  be  allowed  to  fail ; 
our  fellow  bankers  must  come  to  our  assistance, 
and,  if  not  our  fellow  bankers,  then  the  Bank  of 
England  ;  and  if  not  the  Bank  of  England,  then 
the  government."  1  say  that  gives  us  a  locus 
standi^  and  in  the  same  way  as  the  government 
has  had  a  locus  standi  with  regard  to  shipping 
and  has  said  that  excessive  cargoes  shall  not  be 
carried  because  they  are  dangerous  to  the  safety 
of  the  public,  the  question  may  arise  whether  the 
public  might  have  the  right  to  say  that  no  exces- 
sive cargo  shall  be  carried  by  a  bank  receiving 
pubhc  money  —  that  business  shall  be  conducted 
in  a  manner  which  shall  be  considered  safe  by  the 
community  at  large.  [Cheers.]  There  is  one 
measure  which  I  think  may  fairly  be  taken,  and 
which  the  public  would  have  a  right  to  demand,  and 
that  is,  the  more  frequent  publication  of  accounts. 
I  say  that  there  ought  to  be  some  effort  made 
in  this  direction  of  cooperation,  and  if  it  were 
made,  and  if  I  saw  that  there  was  a  tendency  in 
that  direction,  I  can  see  what  measures  might  be 
taken  to  establish  what  I  have  indicated  as  a  sec- 
ond reserve  for  the  country  at  large. 

SUGGESTED  IMPROVEMENTS  IN  THE  CURRENCY 

I  come  now,  and  I  will  endeavor  not  to  detain 
you  much  longer,  to  a  point  which  perhaps  will  be 
more  interesting  to  you  than  a  description  of  the 
situation  —  namely,  the  point  of  suggesting  im- 
provements in  our  cm-rency  and  banking  system. 


HEARING  BEFORE   THE  COMMITTEE     143- 

[Cheers.]  If  you  have  done  me  the  honor  to 
follow  my  arguments  so  far,  you  will  have  seen 
that  I  thought  that  our  gold  reserve  in  this  coun- 
try was  generally  insufficient,  and  that  generally 
our  cash  reserves  were  also  insufficient.  I  am  not 
content  to  see  the  violent  fluctuations,  which  are 
possibly  inevitable.  I  am  not  content  to  see  their 
continuance,  at  least  without  considering  whether 
some  legislation  cannot  be  devised  upon  the  sound- 
est and  the  most  orthodox  principles.  But  you 
will  see  there  is  one  point  upon  which  I  am  ex- 
tremely strong,  and  that  is  that  you  shoidd  not 
devise  any  means  to  alleviate  the  situation  which 
would  mean  a  further  expulsion  of  gold.  [Hear, 
hear.]  Now,  there  is  a  favorite  measure  in  the 
air,  which  is  the  increase  of  the  fiduciaiy  issue  ; 
and  many  persons  think  that  woidd  be  an  advan- 
tage. An  increase  of  the  fiduciary  issue  means,  as 
I  understand  it,  the  substitution  of  paper  for  gold. 
Now,  supposing  you  were  to  issue  £20,000,000 
of  <£!  notes,  and  they  were  to  take  the  place  of 
<£20, 000,000  in  sovereigns  in  the  pockets  of  the 
people,  or  the  tills  of  the  banks,  what  woidd  hap- 
pen to  this  £20,000,000  of  gold?  It  is  the  opin- 
ion of  those  who  are  in  favor  of  this  substitution 
that  £20,000,000  would  be  added  to  our  stock  of 
gold.  [A  voice.  —  "  Yes."]  No,  that  would  not 
be  added  to  our  stock  of  gold.  It  would  go  to  the 
reserve  of  the  Bank  of  England  for  the  moment, 
but  afterwards  it  would,  like  all  our  gold,  be  open 
to  the  world  at  large  ;  and  the  gold  which  we  had 


144  FEDERAL   CLEARING  HOUSES 

called  in,  replacing  it  by  notes,  being  added  to  the 
reserve  at  the  bank,  would  in  the  first  instance,  as 
do  all  other  additions  to  the  reserve,  lower  the 
rate  of  interest,  would  create  great  speculation 
for  the  moment,  and  would  lead  to  the  export  of 
gold  to  other  countries ;  and  having  substituted 
j)aper  for  gold,  you  would  find  that  really  you  have 
not  strengthened  the  reserve  of  gold  except  by  a 
small  portion,  whatever  it  might  be  that  we  might 
gain.  I  cannot  tell  you  the  importance  I  attach 
to  a  thorough  understanding  of  this  principle  by 
the  people  at  large.  They  believe  that  if  we  were 
to  substitute  paper  for  gold  we  could  keep  gold 
under  the  ordinary  arrangements  of  our  Bank 
Charter  Act.  It  is  nothing  of  the  kind.  Paper 
expels  gold  unless  you  take  particular  precautions 
to  retain  the  gold ;  and  for  my  part  I  am  totally 
opposed  to  any  measure  which  would  simply  end 
in  the  expulsion  of  gold  from  the  circulation  of 
this  country.  We  should  keep  our  £25,000,000. 
We  might,  perhaps,  increase  them  to  X26, 000,000 
or  X27,000,000.  We  should  have  done  no  more. 
But  any  movement  to  which  I  would  be  a  party 
in  the  direction  of  the  fiduciary  issue  must  have 
this  result  —  that  you  must  stop  the  gold ;  that 
the  bullion  and  the  gold  which  would  be  brought 
by  the  public  in  exchange  for  the  £\  notes,  or  any 
other  form  of  notes,  should  be  dealt  with  in  such 
a  manner  as  not  to  leave  the  country.  I  would 
establish  it  as  a  second  reserve,  not  to  be  put  into 
the  ordinary  issue ;  but  I  would  have  a  separate 


HEARING  BEFORE  THE  COMMITTEE     145 

stock  of  gold  realized  to  this  country  by  a  certain 
issue  of  paper  money  which  was  to  be  issued  only 
when  emergencies  should  arise.  [Cheers.]  I 
think  that  in  a  very  few  minutes  I  can  make  that 
clear.  I  do  not  know  whether  I  have  been  able 
to  make  this  portion  —  I  will  not  say  of  my  plan, 
but  of  my  principle  —  clear  to  those  whom  I  am 
addressing.  But  what  I  mean  is  this.  When, 
now,  there  is  a  suspension  of  the  Bank  Charter 
Act,  you  suspend  the  Bank  Charter  Act  by  a 
simple  issue  of  paper,  unsupported  by  gold,  and 
sometimes  almost  adding  to  the  dangers  of  the 
situation  by  increasing  your  paper  money  at  a 
time  when  gold  is  leaving  the  country. 

A    SEPAKATE    STOCK    OF   GOLD 

Well,  it  woiUd  be  infinitely  better  if  there  ex- 
isted in  this  country  a  reserve  of  gold,  a  separate 
stock  of  gold,  with  which,  in  time  of  emergency, 
the  Bank  of  England  would  be  able  to  come  to 
the  rescue  of  the  mercantile  community  generally. 
My  object  would  be  to  establish  a  second  reserve 
—  a  reserve  which  we  should  be  able  to  establish 
by  means  of  a  certain  fiduciary  issue  —  and  that 
this  second  reserve,  under  conditions  to  be  defined, 
should  take  the  place  of  the  suspension  of  the 
Bank  Charter  Act  by  providing  the  means  of  the 
further  issue  by  safe  notes,  when  the  position  of 
the  country  might  seem  to  demand  it.  If  such  a 
stock  had  existed  it  woidd  have  been  unnecessary 
to  have  applied  to  the  Bank  of  France  or  to  the 


146  FEDERAL   CLEARING  HOUSES 

government  of  Russia,  or  to  have  gone  to  any- 
other  country  to  increase  your  stock  of  gold  at  a 
given  moment. 

I  ask  you  now  to  return  for  one  second  to  the 
point  which  I  laid  down  at  the  beginning  of  my 
speech.  I  pointed  out  to  you  the  small  amount  of 
bullion  which  we  held,  and  showed  to  you  that  in 
my  judgment  that  amount  of  bullion  ought  to  be 
increased.  I  have  now  indicated  a  method  by 
which  I  think  it  might  be  increased,  and  might  be 
increased  without  imposing  any  tax  on  any  portion 
of  the  community,  but  it  would  be  secured  by  the 
state  foregoing  a  portion  of  the  profit  which  it 
would  make  upon  the  fiduciary  issue.  A  certain 
amount  of  gold  would  be  lying  idle,  and  men 
would  say,  "  Why  should  that  gold  remain  idle  ? 
What  a  sacrifice!  Why  is  it  so?"  WeU,  it 
would  be  the  state  which  would  have  foregone  a 
portion  of  the  profit  which  it  made  on  the  fidu- 
ciary issue,  and  it  could  say,  "It  is  of  such  enor- 
mous importance  there  should  be  a  larger  reserve 
of  bullion  in  the  country  that  we  have  foregone 
this  profit  which  we  may  have  made  upon  our 
paper  issues  because  we  believe  it  to  be  better  to 
secure  a  reserve  to  which  in  times  of  crisis  you 
may  apply."      [Cheers.] 

Such  a  solution  would  only  be  proper,  such  a 
solution  could  only  be  defended,  if  conditions  were 
imposed  which  did  not  aggTavate  the  situation  at 
the  time.  It  would  be  improper  to  touch  such  a 
store  of  gold   if  the  exchanges  were  against  this 


HEARING  BEFORE   THE   COMMITTEE     147 

country.  It  would  be  improper  to  touch  sucli  a 
reserve  if  the  rate  of  interest  were  not  at  such 
a  point  as  to  be  Hkely  to  attract  gold  from  other 
countries.  Do  not  let  us  look  to  anything  which 
would  for  a  moment  palhate  the  difficulty,  but 
which  would  afterwards  aggravate  the  catastrophe 
which  we  are  endeavoring  to  avoid. 

I  have  sought  in  these  matters  to  see  how, 
under  the  most  orthodox  system,  and  leaving  the 
Bank  Charter  practically  intact,  we  might  secure 
a  second  reserve  to  the  country.  I  think  I  am 
bound  to  inform  you  that,  in  this  matter,  I  have 
been  in  communication  with  the  authorities  of  the 
Bank  of  England.  It  is  possible  I  am  not  author- 
ized to  say  we  are  agreed  upon  any  plan.  We 
are  working  at  a  plan,  and  endeavoring  to  see 
whether  some  plan  cannot  be  devised  by  which 
these  violent  fluctuations,  these  internal  panics, 
can  be  avoided.  It  is  difficult  to  deal  with  an  ex- 
ternal panic  ;  but  an  internal  panic  might  be  saved 
by  a  further  issue  of  notes,  not,  as  at  present,  on 
credit,  but  against  a  reserve  which  has  accumu- 
lated by  such  measures  as  I  have  endeavored  to 
describe. 

An  after-dinner  atmosphere  is  not  one  which 
is  fit  for  the  discussion  of  such  subjects  as  I 
have  intruded  upon  you ;  but  remember  the 
words,  if  you  will  be  kind  enough  to  do  so,  with 
which  I  introduced  these  lengthy  remarks.  Re- 
member these  are  not  matters  which  concern  only 
the  banking  commmiity  and  are  only  matters  of 


148  FEDERAL   CLEARING  HOUSES 

high  abstract  theory,  but  they  are  immediate  mat- 
ters of  practical  interest.  If  we  can  secure  that 
there  shall  not  be  those  violent  fluctuations,  if  we 
can  avoid  an  occasional  panic,  or  mitigate  such 
panics  as  cannot  be  avoided,  we  shall  have  done 
something  which  may  not,  I  hope,  be  regarded 
by  our  fellow  countrymen  as  unworthy  of  their 
support  or  unworthy  of  their  commendation. 
[Loud  cheers.] 


IV 


FALLACIES  IN  "  BANKING  UPON  BUSINESS  ASSETS  " 

A  TRACT  entitled  "  Banking  upon  Business 
Assets,  What  the  Experience  of  Nations  has 
been,"  was  printed  in  Indianapolis,  Ind.,  in  1898, 
and  bears  the  caption  "  Part  of  Congressional 
Record." 

In  this  tract  there  are  fallacies  in  the  arguments 
in  favor  of  "  Banking  upon  Business  Assets  " 
which  in  the  interest  of  business  men  should  be 
explained  so  as  to  be  clearly  understood  by  all. 

A  fallacy  is  a  concealed  defect  in  an  argument 
supj)orted  by  an  open  statement  of  facts  and  prin- 
ciples generally  acknowledged  to  be  true.  The 
defect  may  be  concealed  by  design  or  ignorant 
good  faith,  or  by  simple  unpremeditated  omission. 
It  may  exist  because  the  facts  and  principles 
stated  are  not  as  far  reaching  as  the  conclusion 
drawn  from  them.  The  facts  and  principles  may 
govern  as  far  as  they  go,  but  they  may  not  go  as 
far  as  the  conclusion  claims  they  go.  The  best 
intentioned  logic  often  has  a  catch  or  a  trap  in  it 
which  is  hidden  even  to  the  framer  of  the  argu- 
ment. 

A  fallacy,  of  whatever  kuid,  deprives  an  argu- 


150  FEDERAL   CLEARING  HOUSES 

ment  of  its  force,  and  makes  its  conclusions  untrue. 
A  fallacious  argument  starts  with  a  universally 
accepted  truth,  in  this  case  that  banking  assets 
are  the  true  basis  against  which  bank  notes  should 
be  issued,  and  then  proceeds  to  apply  it  in  a  way 
dictated  by  ulterior  motives,  which  in  this  case 
are  to  secure  an  advantage  for  a  private  profit. 
It  is  the  old  ruse  of  stealing  the  livery  of  heaven. 

The  argument  contained  in  the  tract  "  Banking 
upon  Business  Assets  "  is  that  such  assets  are  the 
only  true  basis  for  a  bank  note  circulation  ;  that 
their  use  in  this  way  is  the  universal  practice  of 
the  chief  commercial  nations  of  the  world;  that 
the  safeguards  which  can  be  thrown  around  such 
a  currency  wdll  make  it  safe  and  sound  to  the 
holder,  and  therefore  the  active  efforts  of  all  busi- 
ness men  are  solicited  and  should  be  given  to  help 
pass  the  bill  known  as  the  Indianapolis  Convention 
Bill,  which  gives  to  three  or  four  thousand  banks 
the  power  to  bank  upon  business  assets,  or  in  other 
words  issue  currency  on  their  bank  assets,  retain- 
ing them  in  their  own  possession. 

The  first  fallacy  in  this  argument,  for  there  are 
more  than  one,  is  shown  when  a  business  man  asks 
how  this  bank  currency  is  to  be  issued  and  made 
good. 

The  answer  as  to  the  mode  of  issue  is  this  :  that 
under  the  proposed  system  the  bank  will  ask  the 
business  man  to  give  it  good  collateral  and  his 
note,  which  thereby  becomes  a  lien  on  his  estate, 
and  it  wiU  then  give  him,  less   the   discount,  its 


BANKING   UPON  BUSINESS  ASSETS     151 

circulating  notes,  which  he  can  use  in  buying  a 
stock  in  trade.  The  bank  will  further  explain 
that  it  will  make  similar  loans  to  the  full  extent 
of  its  legal  jjower  to  other  business  men,  so  as  to 
make  as  much  money  as  possible  out  of  this  privi- 
lege. 

The  business  man  will  then  ask  how  the  notes 
are  to  be  made  good.  The  bank  answers  that  if 
all  goes  well  the  business  man  will  sell  enough  of 
his  stock  in  trade  to  pay  his  notes  by  the  time 
they  mature.  But  the  business  man,  being  in- 
cHned  to  prudence,  asks  what  will  be  the  result  if 
his  notes  mature  on  a  panicky  market  when  he 
cannot  sell  at  a  profit.  The  plain  and  disagree- 
able answer  deprived  of  all  circumlocution  is  that 
if  the  borrower  engages  to  pay  a  certain  smn  of 
money  at  a  fixed  time  he  must  perform  his  engage- 
ment, for  the  bank  has  its  engagements  to  fulfill, 
and  may  need  the  money  to  preserve  its  solvency. 
The  business  man  then  sees  that  the  soundness  of 
tliis  currency,  which  is  so  extolled,  is  maintained 
at  his  expense  ;  that  besides  the  risk  of  his  busi- 
ness, he  is  taking  the  risk  of  the  money  market; 
that  the  lien  on  his  estate  which  he  gave  the  bank 
may  require  him,  in  event  of  a  monetary  disturb- 
ance, to  sacrifice  so  much  of  his  property  as  will 
protect  the  bank. 

The  argmnent  then  in  favor  of  the  soundness 
of  the  currency  issued  on  business  assets  is  that 
enough  cash  can  always  be  had  by  a  sacrifice  of 
the  assets  of  business  men  to  make  the  currency 


152  FEDERAL   CLEARING  HOUSES 

perfectly  good,  or  in  other  words  that  the  business 
houses  who  pledge  their  assets  have  sufficient  capi- 
tal in  their  business  to  yield  enough  cash  under 
pressure  to  pay  their  bank  debts  even  at  panic 
prices.  So  the  resource  the  banks  contemplate  in 
connection  with  their  bill  for  banking  on  business 
assets  is  upon  the  estates  of  their  borrowers,  and 
they  are  willing  to  engage  to  get  enough  money 
from  this  source  to  keep  their  bank  notes  good,  so 
that  no  holder  shall  ever  lose  a  dollar  thereby. 

So  we  discover  a  fallacy  in  the  claim  that  bank 
currency  issued  on  business  assets  is  so  good  that 
no  holder  can  ever  lose  by  it,  in  the  method  that 
the  banks  propose  to  adopt  to  make  this  currency 
good.  What  is  the  advantage  in  protecting  the 
holder  of  the  currency  from  loss  by  inflicting  a  loss 
upon  the  borrower  ?  Is  it  a  full  and  true  state- 
ment of  the  case  to  laud  and  magnify  the  sound- 
ness of  the  currency  and  its  freedom  from  loss, 
and  say  nothing  about  the  greater  loss  which  the 
business  man  is  most  vitally  interested  in,  wliich 
results  from  the  effort  of  the  bank  to  keep  the 
currency  sound  ? 

"  The  demand  of  a  crisis  or  a  change  in  the 
commercial  situation,"  says  the  writer  of  "  Banking 
upon  Business  Assets,"  ''  often  makes  it  necessary 
for  a  banking  institution  to  redeem  a  large  part 
of  its  note  issues  in  cash  to  pay  off  depositors  in 
cash,  and  to  contract  at  once  the  volume  of  its 
issues  and  its  discounts."  The  contraction  of  the 
volume  of  discounts  in  a  crisis  to  supply  the  banks 


BANKING   UPON  BUSINESS  ASSETS     153 

with  the  cash  to  redeem  their  notes  may  make  the 
notes  good,  but  it  is  done  at  the  expense  of  those 
who  have  discounted  their  notes  at  the  banks.  Is 
it  not  a  specious  argument  to  claim  that  "  the  issue 
of  notes  upon  business  assets  is  abundantly  safe  to 
the  note-holder,"  and  to  say  nothing  of  the  great 
losses  which  the  contraction  of  such  a  currency 
inflicts  upon  the  commercial  community  ? 

That  such  "  changes  in  the  commercial  situa- 
tion "  otherwise  called  "  crises "  or  panics  must 
be  anticipated,  is  acknowledged  by  the  writer  of 
"Banking  on  Business  Assets."  They  began  to 
occur  a  few  years  after  the  establishment  of  the 
modern  credit  system  two  hundred  years  ago,  when 
the  Bank  of  England  was  mcorporated.  In  the 
Bullion  Report  of  1810,  they  are  called  those 
"  occasional  failures  of  confidence  which  are  in- 
separable from  the  credit  system."  The  financial 
history  of  the  United  States  and  England  during 
the  last  twenty  years  shows  that  the  liability  to 
panics  still  continues,  at  the  end  of  these  two  cen- 
turies, as  one  of  the  most  prominent  factors  of 
business  life.  Panics  therefore  cannot  be  waved 
aside  as  events  not  likely  to  recur. 

The  answer  of  the  bank  to  the  question  of  the 
business  man  as  to  how  the  proposed  asset  cur- 
rency is  to  be  made  good  in  the  stress  of  panic, 
when  reduced  to  its  fewest  possible  words,  must 
therefore  be  "  Out  of  your  estate."  This  is  the 
currency  which  its  advocates  claim  is  entirely  safe, 
and  can  cause  no  loss  to  the  holder.     The  fallacy 


154  FEDERAL   CLEARING  HOUSES 

in  the  argmnent  is  that  it  may  cause  ruin  to  the 
borrower.  It  is  not  claimed,  because  it  cannot  be, 
that  such  currency  will  not  produce  a  loss  ;  there- 
fore the  freedom  from  loss  is  limited  to  the  holder, 
as  if  he  were  the  only  one  to  be  considered,  and  as 
if  that  constituted  a  safe  and  harmless  currency. 
The  safety  is  partial,  the  destruction  is  universal. 
What  is  wanted  is  a  currency  which  is  both  safe 
to  the  holder  and  safe  to  the  borrower  also.  This 
can  be  reached  by  giving  the  banks  another  way  of 
making  their  obligations  good  besides  forcing  liqui- 
dations on  the  public,  and  that  is  accomplished 
by  giving  them  access  to  a  source  of  supply  of 
undoubted  credit,  ample  enough  to  meet  all  their 
wants,  to  which  they  can  go  mthout  disturbing 
business. 

Another  fallacy  which  shoidd  be  exposed  lurks 
in  the  argument  that  since  bank  currency  is  issued 
on  business  assets  by  the  banks  of  France  and 
Germany  and  of  other  civilized  nations,  we  woidd 
follow  the  best  examples  by  giving  the  same  privi- 
lege to  the  banks  of  the  United  States.  On  the 
contrary,  to  do  so  would  be  a  most  flagrant  depart- 
ure from  the  examples  of  the  countries  named. 

If  the  laws  of  France  are  referred  to  it  appears 
that  the  power  to  issue  currency  is  limited  to  one 
establishment  of  credit,  the  Bank  of  France. 
French  writers  and  members  of  the  Assembly,  in 
their  debates  over  the  Charter  of  the  Bank  of 
France  in  1847,  when  it  took  its  present  form, 
unite  in  advocating  a  single  source  for  the  emis- 


BANKING   UPON  BUSINESS  ASSETS     155 

sion  of  bank  bills.  Tbeir  contention  was  that  it 
is  a  function  of  the  government  to  provide  a  cir- 
culating medium,  and  if  the  government  delegates 
its  authority  it  must  be  with  such  restrictions  that 
the  money  authorized  shall  be  able  to  circulate 
freely  throughout  the  entire  nation.  In  Germany 
a  similar  restriction  is  imposed  on  the  issue  of  bank 
currency,  and  only  six  banks  have  that  privilege. 
The  fallacy  in  the  argiunent  is  shown  if  it  is  baldly 
stated  that,  since  the  power  of  issue  on  bank  assets 
is  granted  to  one  bank  in  France  and  six  in  Ger- 
many, therefore  it  would  be  well  to  give  the  same 
power  to  four  thousand  banks  in  the  United  States. 
Even  the  most  casual  reader  will  recognize  that  the 
very  essence  of  French  and  German  legislation  is 
the  restriction  to  the  smallest  possible  number  of 
the  power  to  issue  bank  currency.  A  truer  state- 
ment would  be  that  since  the  power  to  issue  bank 
currency  on  business  assets  is  restricted  in  France 
and  Germany  to  but  few  banks,  therefore  the 
same  power  shoidd  be  given  to  but  few  banks  in 
the  United  States ;  and  as  the  banks  in  France  and 
Germany  possessing  this  power  are  of  a  higher 
grade  than  the  popidar  or  commercial  banks  of 
those  nations,  therefore  the  power  to  issue  should 
be  given  in  the  United  States  only  to  institutions 
like  our  clearing  houses,  who,  while  intimately  con- 
nected with  our  popular  commerical  banks,  are  still 
one  remove  farther  than  they  from  the  pressure  of 
commercial  interests. 

Tliat  the  bestowal  of  the  power  of  issue  upon 


it    It 


156  FEDERAL   CLEARING  HOUSES 

four  thousand  banks,  each  one  in  that  respect  the 
peer  of  the  Bank  of  France,  would  sooner  or  later 
be  attended  with  a  period  of  "  failure  of  confidence 
in  the  credit  system"  will  hardly  be  questioned  by 
any  who  are  versed  in  financial  affairs.  The  restric- 
tion of  the  power  of  issue  in  few  hands  becomes 
therefore  a  vital  necessity  in  forming  our  banking 
system,  and  tliis  point  is  entirely  evaded  by  the 
writer  of  the  tract  "  Banking  upon  Business  Assets." 

Another  fallacy  is  in  the  com]3arison  of  bank 
note  issues  secured  by  pledge  with  a  state  official 
of  state  securities  before  the  Civil  War,  and  note 
issues  on  bank  assets  by  banks  who  had  in  their 
own  hands  the  security  to  their  notes.  The  two 
points  of  comparison  are  here  confused.  The  com- 
parison should  first  be  on  the  advantages  and  disad- 
vantages of  a  currency  secured  by  pledge  of  assets 
in  the  hands  of  a  trustee  or  of  a  currency  issued 
against  assets  remaining  in  the  hands  of  the  bank. 
This  comparison  has  nothing  to  do  with  the  charac- 
ter of  the  assets,  but  only  with  the  mode  of  issue. 
Assuming  tliat  the  assets  on  which  this  currency  is 
issued  were  alike  in  both  cases,  the  question  is  which 
method  is  the  best  and  safest  for  the  community,  — 
to  have  the  assets  held  by  a  trustee  for  the  benefit 
of  the  note-holder,  or  to  have  them  remain  in  the 
hands  of  the  issuing  bank. 

For  instance,  would  the  national  bank  currency 
be  just  as  safe  if  the  1300,000,000  of  govern- 
ment bonds  now  held  by  the  Treasurer  of  the 
United  States  in  trust  for  the  note-holders  were 


BANKING   UPON  BUSINESS  ASSETS     157 

returned  to  the  possession  and  custody  of  tlie 
banks  whose  notes  are  outstanding  against  them  ? 
Or,  taking  another  instance,  woukl  a  currency 
issued  on  bank  assets  in  the  hands  of  a  loan  com- 
mittee be  no  safer  than  a  currency  on  bank  assets 
hekl  by  the  bank  ?  The  answer  must  necessarily  be 
that  if  there  are  four  thousand  issuing  banks,  it  is 
far  safer  for  the  public  to  have  the  services  of  a  trus- 
tee to  hold  the  security.  A  trusteeship  gives  the 
public  a  guarantee  of  the  safe  custody  of  the  collat- 
eral and  its  right  application  for  the  purpose  for 
which  it  was  pledged.  A  trusteeship  also  causes  a 
scrutiny  of  the  collateral  and  a  certain  measure  of 
publicity  in  the  transaction  which  cannot  fail  to  be 
salutary.  If  the  board  of  directors  of  any  one  of 
four  thousand  banks  can  close  the  transaction  of  a 
note  issue  in  their  back  parlor  and  pass  upon  the 
security  without  supervision,  their  cupidity  will  too 
often  get  the  better  of  their  judgment,  and  the 
foundation  will  be  laid  for  ''a  failure  of  confi- 
dence in  the  credit  system."  Even  the  directors 
of  the  Bank  of  England  erred  in  this  way,  and  the 
sharp  criticism  of  their  conduct  was  perhaps  the 
chief  cause  of  the  passage  of  Peel's  bill  of  1844, 
which  took  out  of  their  hands  the  power  of  note 
issue.  How  much  more  liable  to  such  errors  would 
be  the  directors  of  four  thousand  banks  scattered 
all  over  our  country ! 

The  comparison  should  be,  second,  on  the  desira- 
bility of  limiting  the  security  for  circulation  to 
specific  classes  of  assets  like  government  bonds,  or 


158  FEDERAL   CLEARING  HOUSES 

allowing  bank  notes  to  be  issued  on  business  assets. 
Here  it  is  easy  to  agree  with  the  writer  of  "  Bank- 
ing upon  Business  Assets."  The  National  Bank 
Act  allows  the  banks  to  invest  their  money  in 
various  kinds  of  quick  securities  called  for  con- 
venience business  assets,  and  it  prohibits  banks 
from  holding  real  estate  beyond  a  certain  period. 
These  provisions  are  intended  to  keep  bank  assets 
in  quick  or  liquid  condition.  It  is  evident  that  it 
is  not  only  reasonable,  but  it  is  demanded,  in  the 
interest  of  commerce,  that  banks  should  be  able 
to  use  these  same  assets  in  procuring  currency. 
First,  the  assets  shoidd  be  liquid,  and  second,  the 
banks  should  be  able  to  turn  them  into  ciuTency 
at  will  for  their  own,  and  their  customers'  protec- 
tion. This  can  be  done  by  incorporating  the 
clearing  houses  under  a  federal  law  to  qualify  them 
to  act  as  trustees  for  the  public  and  then  giving 
them  the  power  to  receive  and  hold  bank  assets  and 
issue  bank  currency  thereon  with  a  safe  margin 
for  the  protection  of  the  note-holder,  any  result- 
ing loss  to  be  assessed  first  on  the  members  of  the 
issuing  clearing  house. 

The  fallacy  can  readily  be  seen  in  the  argument 
which  condenses  two  comparisons  into  one  and 
ignores  the  fundamental  premise  of  each.  The 
deduction  is  necessarily  false  and  the  conclusion 
untrue.  The  principle  of  a  trusteeship  to  hold 
the  collateral  for  the  currency  is  demanded  under 
a  general  law,  and  the  trustee  should  be  allowed 
to  receive  business  assets  as  such  collateral.     The 


BANKING   UPON  BUSINESS  ASSETS     159 

existence  of  a  trusteesliip  protects  the  community 
against  a  "  failure  of  confidence  in  the  credit  sys- 
tem," and  the  privilege  of  using  bank  assets  for 
bank  currency  gives  the  banks  a  resource  besides 
contracting  the  volume  of  discounts  at  the  expense 
of  borrowers. 

But  the  biU  advocated  by  the  writer  of  "  Bank- 
ing upon  Business  Assets  "  does  not  propose  a 
trusteeship  for  the  benefit  of  the  note-holder,  nor 
does  it  propose  a  mode  of  protection  for  the  bor- 
rower. It  is  a  bill  for  private  profit,  and  the 
"  variance  between  the  bank  and  its  customer  " 
which  S.  Hooper,  M.  C,  a  merchant  of  Boston, 
noticed  a  generation  ago,  is  perpetuated.  Business 
men  should  understand  that  the  principle  of  the 
Indianapolis  Convention  bill,  advocated  by  the 
writer  of  "  Banking  upon  Business  Assets,"  is 
specious  and  dangerous,  and  affords  them  no  relief 
from  the  burdens  and  defects  of  the  present  sys- 
tem. The  abandonment  of  a  trusteeship  for  the 
currency  is  incompatible  with  a  general  law. 

It  also  proposes  a  system  of  branch  banking 
which  is  im- American,  the  discussion  of  which  is  to 
be  found  on  page  258. 

A  comparison  between  systems  of  banking  pre- 
vailing in  the  United  States  is  not  a  simple  one. 
Banking  on  bank  assets  in  the  hands  of  the  issu- 
ing banks  caused  the  panic  of  1837.  Woidd  not 
the  same  principle,  put  in  practice  in  the  same  way 
at  the  present  time,  ultimately  produce  the  same 
results  ?      What    is    the    worth    of    experience  ? 


160  FEDERAL   CLEARING  HOUSES 

Compare  tlie  banks  of  1837  liolding  the  security 
in  their  own  hands  and  the  banks  of  1898  who 
have  pledged  government  bonds  at  Washington, 
and  then  answer  which  produces  the  safest  cur- 
rency. The  banking  system  of  1837  was  success- 
ful in  one  aspect.  After  the  liquidation  took  place, 
by  which  it  was  estimated  the  country  lost  six 
thousand  millions  of  dollars,  the  banks  had  realized 
enouo'h  cash  from  the  estates  of  borrowers  to  en- 
able  a  good  portion  of  them  to  resume,  and  many 
of  them  paid  their  notes  in  gold.  During  the 
suspension  some  continued  to  pay  dividends. 
Can  a  system  be  called  successful  which  recovers 
itself  at  such  a  fearful  loss  to  the  business  com- 
munity? The  banks  first  invited  borrowers  to 
take  money,  and  then  compelled  repayment  with 
the  attendant  sacrifices. 

But  the  comparison  is  not  probably  intended  to 
be  made  between  the  banks  of  1837  and  1898, 
though  they  represent  the  two  systems  in  their 
most  distinctive  character,  but  between  the  note 
issues  on  bond  security  from  1838  to  1850  and 
note  issues  on  bank  assets  up  to  1860,  omitting  all 
reference  of  course  to  the  liquidations,  panics,  and 
misery  caused  in  the  process  of  making  the  bank 
asset  currency  good.  Peace  reigned  in  Warsaw 
after  the  country  had  been  devastated,  and  so  the 
asset  currency  of  many  banks  has  been  trimn- 
phantly  redeemed  by  the  slaughter  of  business 
houses  when  none  were  left  to  tell  the  tale  of  what 
the  redemption  cost. 


BANKING  UPON  BUSINESS  ASSETS     161 

The  true  comparison  is  between  the  effect  on  the 
nation  of  a  currency  secured  by  assets  as  collateral 
security  thereto  in  the  hands  of  a  trustee  and  one 
secured  by  assets  in  the  hands  of  the  issuer. 
Whether  the  currency  is  based  on  government 
bonds  or  banking  assets,  is  it  better  to  have  the 
government  bonds  or  the  banking  assets  in  the 
hands  of  a  trustee  or  in  the  hands  of  the  bank  ? 

The  answer  is  that  it  is  better  to  have  the  secu- 
rity held  by  a  trustee,  because  the  payment  of  the 
notes  is  thereby  better  assured,  and  the  notes  be- 
come more  acceptable  to  the  public,  and  they  may 
be  used  by  banks  in  meeting  the  demands  of  de- 
positors, and  above  all  they  give  the  banks  another 
way  of  realizing  money  on  the  debts  of  their  cus- 
tomers instead  of  restricting  business  and  forcing 
liquidations  and  creating  panics. 

Senator  Rives,  of  Virginia,  said  before  the 
Senate,  in  debate  on  Webster's  "  Plan  for  an 
Exchequer,"  on  December  29,  1841,  "  Ricardo's 
principle  is  that  the  power  of  issue  is  a  power  to 
create,  while  the  power  of  banking  is  a  power  to 
use."  The  principle  is  as  true  to-day  as  when 
Hives  quoted  it.  The  banks  are  called  into  being 
to  do  business  in  the  money  coined  and  created  by 
the  government.  And  since  it  is  a  useless  waste 
to  keep  all  banking  deposits  idle,  banking  laws 
allow  banks  to  lend  their  deposits,  keeping  only  a 
safe  reserve  in  cash ;  and  since  occasional  crises 
occur  when  a  greater  amount  of  undoubted  money 
is  needed  than  the  reserve  provides,  therefore  the 


162  FEDERAL   CLEARING  HOUSES 

government  should  make  special  provision  for  the 
issue  to  banks  of  currency  sufficient  for  their  needs, 
so  that  they  shall  not  he  compelled  to  harass  their 
debtors.  This  currency  must  therefore  be  issued 
on  the  assets  of  banks ;  and  to  make  the  currency 
independent  of  the  banks,  so  that  they  can  use  it 
in  payment  of  their  debts,  it  must  be  issued  by 
corporations  acting  as  trustees  for  the  public.  By 
this  method  a  currency  is  formed  which  would  be 
safe  to  the  holder  and  a  protection  to  the  business 
community,  including  the  agricultural,  manufactur- 
ing, and  trading  interests. 

No  day  of  retribution  for  the  country  would 
follow  the  issue  of  currency  in  this  way ;  there 
would  be  no  waking  up  to  find  that  the  banking 
system  had  been  founded  upon  a  fallacy. 


A   CENTURY    OF   PANICS  ^ 

What  is  money? 

1.  It  is  clear  that  the  coin  of  the  reahn  is 
money,  and  its  chief  quality  is  that  it  may  be  used 
as  a  legal  tender  in  the  payment  of  debts. 

2.  Paper  issued  by  the  government  and  declared 
to  be  legal  tender  is  also  money. 

3.  Paper  in  the  form  of  bank  notes,  and  author- 
ized by  law  to  be  circulated  as  money,  is  money, 
provided  the  maker  is  solvent,  and  the  creditor 
will  accept  it,  and  the  credit  system  is  maintained. 

4.  Paper  in  the  form  of  checks  on  banks  or 
individuals  which  transfer  a  debt  is  money,  pro- 
vided again  that  the  maker  is  solvent  and  the 
creditor  will  accept  it,  and  the  credit  system  is 
maintained. 

5.  The  credits  on  the  books  of  banks  and  in- 
dividuals which  may  be  transferred  as  money  by 
checks  are  money.  They  are  money  in  j^osse, 
that  is,  book  credits  can  be  turned  into  money  at 
the  will  of  the  creditor.  They  are  money  as  long 
as  the  credit  system  works  smoothly. 

1  A  paper  read  before  the  Anthropological  Society  of  Yonk- 
ers,  New  York. 


164  FEDERAL   CLEARING  HOUSES 

These  five  classes  of  money  can  be  reduced  to 
two.  One  class  is  money  made  legal  tender  by 
law,  wbicb  is  either  coin  or  government  paper. 
The  other  is  bank  notes,  checks  and  book  credits, 
which  are  either  authorized  by  law  to  circulate 
as  money,  or  are  permitted  to  do  so  by  common 
law. 

The  law  authorizes  bank  notes  to  be  circulated 
as  money,  but  does  not  compel  the  public  to  take 
them.  The  banks  can  circulate  them  only  as  they 
find  persons  ready  to  accept  them.  The  law  does 
not  take  cognizance  of  checks,  except  in  some 
States  to  forbid  their  issue  unless  the  drawer  has  a 
credit  balance  with  the  drawee  equal  to  the  amomit 
of  the  check.  Checks  are  not  illegal,  and  when 
they  do  circulate  they  perform  the  functions  of 
money  and  can  be  cashed  and  must  be  considered 
as  money.  So  bank  and  other  book  credits  must 
be  considered  as  money,  because  they  can  be 
checked  for  and  thus  turned  into  money,  and  while 
the  credit  system  is  maintained  the  banks  and  all 
solvent  parties  profess  and  claim  and  announce 
that  they  will  pay  on  demand  their  book  credits  on 
presentation  of  checks.  These  book  credits  and 
checks  transferring  them  constitute  the  bulk  of  the 
money  of  the  country.  But  checks  and  credits  can 
be  money  only  if  the  credit  system  is  maintained. 

So  after  answering  the  question.  What  is  money, 
we  must  next  ask.  What  is  the  credit  system,  the 
maintenance  of  which  is  necessary  to  the  existence 
of  the  greatest  part  of  the  money  of  a  country. 


A   CENTURY  OF  PANICS  165 

Why  does  the  quantity  of  money  in  a  country 
depend  on  the  maintenance  of  the  credit  system  ? 

The  modern  credit  system  began  by  the  estab- 
lishment of  the  Bank  of  England  in  1G94.  The 
theory  on  which  it  is  based  is  that  if  a  niunber  of 
people  deposit  coin  with  a  bank,  by  the  laws  of 
averages  and  probabilities,  they  will  not  all  want 
their  money  at  the  same  time.  Consequently  if  a 
reserve  of  one  quarter  or  one  third  of  the  coin  is 
kept  on  hand,  it  will  be  sufficient  to  supply  all 
ordinary  demands  of  depositors.  If  more  cash  is- 
needed,  the  reserve  will  afford  sufficient  time  to 
collect  from  debtors  enough  additional  money  to 
pay  all  demands.  By  this  application  of  the  laws 
of  averages  and  probabilities,  and  often  with  a 
good  deal  of  reliance  on  the  law  of  chances,  the 
bank  can  with  more  or  less  safety  lend  the  bal- 
ance of  the  deposits,  66-|  or  75  or  85  per  cent., 
on  short  time  at  interest. 

The  66|or75or85  per  cent,  of  the  deposit  which 
is  loaned  is  therefore  doing  a  double  service,  and 
the  interest  on  the  extra  service  gives  his  profit 
to  the  banker.  The  money  is  circulating  in  trade, 
and  yet  the  depositor  considers  it  as  cash  to  liis 
credit  in  bank,  because  the  bank  engages  to  pro- 
duce it  when  wanted.  The  bank,  however,  relies 
on  the  laws  of  averages  and  probabilities  and 
chances  to  enable  it  to  perform  its  obligations. 

Our  legislatures  and  Congress  recognize  the 
safety  of  a  reliance  on  these  abstract  laws,  and 
they  authorize  banks  to  do  business  on  this  theory, 


166  FEDERAL   CLEARING  HOUSES 

and  therefore  the  credit  system  has  been  incor- 
porated into  the  law  of  the  land.  The  same  theo- 
ries are  put  into  practice  by  all  business  men  in 
the  conduct  of  their  business,  and  so  the  principles 
of  the  credit  system  enter  into  all  commercial  trans- 
actions. 

On  these  theories  the  credit  system  is  based. 
The  profit  residting  from  thus  economizing  the  use 
of  capital  and  multiplying  its  benefits  fully  war- 
rants the  remark  of  Webster,  "  Credit  has  done 
more  to  enrich  nations  a  thousand  times  than  all 
the  mines  of  all  the  world." 

The  original  method  of  banking  operations  was 
the  reverse  of  the  check  system  of  the  present  day, 
but  the  credit  theory  was  the  same.  Instead  of 
placing  a  loan  to  the  credit  of  a  borrower  the 
bank  would  deliver  to  him  its  notes  to  the  full 
amount  of  the  loan,  which  he  put  into  circulation 
at  his  convenience.  The  reverse  of  this  operation, 
that  is,  the  check  system,  now  universally  adopted, 
was  introduced  in  1793,  as  a  result  of  the  panic  of 
that  year  and  as  a  means  of  circumventing  the 
legal  provisions  on  which  was  based  the  monopoly 
of  the  Bank  of  England. 

The  credit  system,  we  see  from  this  short  sum- 
mary, has  been  on  trial  for  the  two  centuries  since 
the  establislmient  of  the  Bank  of  England  in 
1694.  A  comparison  of  these  two  centuries  as 
respects  the  condition  of  commerce,  the  advance- 
ment of  civilization  and  science  and  mental  activ- 
ity, shows  that  the  fii'st  was  a  century  of  inaction 


A   CENTURY  OF  PANICS  167 

and  quiet  and  preparation,  and  the  second  was  full 
of  modern  life  and  business  progress  and  realiza- 
tion. 

A  century  or  two  gives  after  all  but  a  sbort  base 
line  for  a  survey  of  theories  and  principles.  After 
the  second  or  the  third  or  the  tenth  or  the  fiftieth 
century  we  find  questions  like  that  of  capital  pun- 
ishment still  debated  and  stiU  unsettled.  A  century 
is  but  a  short  time  in  which  to  test  a  principle  of 
government,  or  to  put  a  government  itself  to  the  test. 
It  is  a  short-lived  nation  that  takes  no  longer  than 
a  century  to  rise  and  less  than  a  century  to  fall. 
The  modern  system  of  credit  being  now  about  two 
centuries  old,  a  time  has  come  when  at  least  an 
observation  or  a  survey  can  be  taken. 

The  two  centuries  of  its  existence  are  radically 
different  in  the  tests  to  which  it  was  exposed,  as 
well  as  in  the  character  of  the  events  of  each.  The 
first  few  years  after  the  development  of  the  credit 
system  are  fruitful  for  economic  study.  In  1G96, 
two  years  after  its  establishment,  the  Bank  of  Eng- 
land was  obliged  to  suspend  papnent  of  its  notes 
in  specie,  because  it  pushed  the  credit  theory  too 
far  by  lending  ninety-eight  per  cent,  of  its  means 
and  having  only  two  per  cent,  on  hand  as  a  reserve. 
Montagiie,  the  astute  finance  minister  of  William 
the  Third,  having  a  clear  understanding  of  bank- 
ing questions,  devised  an  issue  of  government  cur- 
rency, called  exchequer  bills,  to  support  the  newly 
inaugurated  credit  system.  This  issue  of  bills 
relieved  the  distresses  of  the  mercantile  commu- 


168  FEDERAL   CLEARING  HOUSES 

nity,  helped  the  Bank  of  England  out  of  its  dif- 
ficulties, and  restored  the  credit  system  to  suc- 
cessful operation.  Whether  or  not  Montague's 
exchequer  bills  were  the  prototypes  of  our  modern 
clearing-house  certificates,  it  is  remarkable  that 
assistance  from  such  an  adjunct  was  found  neces- 
sary so  early  in  the  history  of  the  credit  system. 

It  would  seem  that  the  whole  subject  of  credit 
was  exploited  to  its  inmost  recesses  by  the  business 
men  and  bankers  and  statesmen  of  that  day.  No 
wonder  the  people  of  France  and  England  went  mad 
over  this  new  method  by  which  poverty  was  to  be 
banished  from  the  earth  and  luxury  was  to  be  the 
common  lot  of  all.  There  would  appear  to  be  no 
devices  now  used  on  our  stock  exchanges  which 
were  not  familiar  to  all  classes  then.  Paper  wealth 
poured  in  on  the  people,  and  their  frenzied  intoxi- 
cation over  their  financial  happiness  knew  no 
bounds.  But  alas  !  Law's  Mississippi  scheme  and 
the  South  Sea  bubble  were  both  pricked,  and  in 
the  reaction  the  whole  credit  system  was  con- 
demned and  almost  abandoned.  Few,  if  any,  books 
on  the  credit  system  were  written  after  Law's  pro- 
foimd  works.  Credit  had  a  brilliant  opening,  and 
its  possibilities  were  worked  out  to  the  uttermost. 
It  was  like  liquid  air,  beautiful  and  fascinating  to 
look  upon,  but  with  a  tendency  to  blow  up  every 
one  that  experimented  with  it,  and  it  seemed 
doubtful  whether  it  could  ever  be  put  to  a  practi- 
cal use. 

Omitting  these  extravagant   financial  episodes, 


A   CENTURY  OF  PANICS  169 

and  the  shy  at  the  first  start  which  Montague  so 
sagaciously  controlled,  the  first  century  of  the 
credit  system  was  one  marked  by  the  domination 
of  old  beliefs  and  thought.  The  splendid  page 
of  history  written  by  the  Puritans  was  followed 
by  the  enervating  influence  of  a  self-indulgent 
aristocracy.  There  was  no  general  awakening 
until  toward  the  close  of  that  century,  when  the 
revolutionary  storms  swept  over  two  continents, 
breaking  up  the  crusts  of  ages  and  brushing  away 
the  growths  of  centuries.  During  that  first  century 
the  same  text-books  were  used  by  students  at  Har- 
vard College  almost  one  hundred  years  apart.  Our 
ancestors  led  happy  and  undisturbed  lives,  walking 
in  the  same  steps  for  generation  after  generation. 
Banking  was  confined  within  narrow  limits  by  this 
stagnation.  England  and  America,  compared  with 
other  civilized  countries,  were  backward  in  the 
development  of  internal  improvements.  In  Amer- 
ica the  issue  of  colonial  currency  only  made  the 
poverty  worse.  In  England  the  chief  financial 
discussions  were  over  the  debasement  and  clij)ping 
of  the  coins. 

During  that  first  century  England  was  engaged 
in  the  wars  necessary  to  consolidate  the  British 
Isles  under  one  government  and  to  establish  her 
priority  among  the  nations  of  the  earth.  An  irre- 
pressible conflict  with  France  for  leadership  in 
Europe  and  America  ended  by  placing  England 
in  that  coveted  position.  The  innate  force  of  the 
Anglo-Saxon  race  impelled  them  forward.     Com- 


170  FEDERAL   CLEARING  HOUSES 

merce  and  trade  waited  for  this  conflict  to  end. 
The  question  was  whether  England  was  to  be  an 
insular  or  a  world  power,  and  whether  or  no  the 
Angio-Saxon  race  was  to  arouse  itself  from  an 
ignoble  lethargy  that  had  settled  upon  it.  At  the 
close  of  the  first  century  of  the  history  of  modern 
credit,  the  change  had  taken  place.  The  position 
of  the  Anglo-Saxon  race  was  secured.  The  issue 
of  government  paper  was  condemned.  The  uni- 
formity of  the  coinage  was  established. 

The  Bank  of  England  had  been  the  greatest 
bank  in  the  world  during  all  that  century,  and  had 
easily  performed  all  banking  functions  for  Eng- 
land. Possessing  a  monopoly,  without  restriction, 
there  was  no  other  bank  at  all  comparable  with  it. 
Having  a  capital  of  over  $50,000,000,  it  was  the 
marvel  of  Christendom.  But  with  the  advent  of 
priority  among  nations,  a  different  state  of  affairs 
rapidly  developed.  In  1750  there  were  but  twenty 
banks  in  London,  in  1790  there  were  over  four 
hundred.  From  1775  to  1793  the  commerce  and 
trade  of  England  received  a  great  impetus. 

In  that  time  Brindley,  who  has  been  called  "  the 
father  of  the  modern  commercial  greatness  of  Eng- 
land," began  the  development  of  the  canal  system 
which  made  the  commerce  of  the  interior  cities 
possible.  Arkwright  invented  his  spinning  ma- 
chine and  Watt  his  steam  engine,  and  with  the 
successful  application  of  machinery  to  the  indus- 
trial arts,  England  began  to  supply  the  markets  of 
the  world  and  rose  to  the  highest  point  of  material 


A   CENTURY  OF  PANICS  171 

prosperity.  With  tlie  awakening  in  business  came 
the  revolutions  which  founded  constitutional  gov- 
ernment, which  overthrew  the  ancient  artificial 
systems  in  science  and  founded  the  natural,  and 
all  was  accompanied  by  an  outburst  of  modern 
music  in  a  major  key  to  complete  the  semblance  of 
a  triumphal  march  to  usher  in  modern  civilization. 
With  the  increase  of  commerce  the  relative 
position  of  the  Bank  of  England  was  changed. 
The  bank  had  been  able  to  maintain  order  and 
stability  when  there  were  twenty  banks  in  London, 
when  stage  coaches  were  the  speediest  mode  of 
travel,  and  commerce  was  confined  to  tide  water. 
But  the  increase  to  four  hundred  banks,  and  the 
development  of  manufactures,  and  the  invention  of 
machinery,  and  the  use  of  steam,  and  the  comple- 
tion of  the  canal  system,  reduced  her  power  to  con- 
trol the  money  market  in  proportion  to  the  growth 
of  business  to  be  facilitated  and  controlled.  The 
reserve  which  had  been  ample  for  business  before 
the  rise  of  manufactiu-es  and  commerce,  and  be- 
fore the  markets  of  the  world  were  opened  to  Eng- 
land, thereafter  became  inadequate,  and  vulnerable 
to  attacks  from  loss  of  confidence.  The  Bank  of 
England  became  dwarfed  by  the  modern  structures 
which  gTcw  up  around  it.  The  credit  system  was 
to  be  put  to  new  trials  thereafter. 

The  first  test  came  in  1793.  There  had  been 
and  could  have  been  no  such  test  in  the  one  hundred 
years  since  the  establislnnent  of  the  bank.  The 
occasion  of  the  panic  of  1793  was  the  declaration 


172  FEDERAL   CLEARING  HOUSES 

of  war  by  France,  which  threatened  the  trade  of 
England  and  her  commercial  supremacy.  A  few 
failures  took  place  in  the  early  months  of  1793, 
and  every  bank  and  business  house  from  the  Bank 
of  England  down  became  alarmed  and  began  to 
hoard  guineas  to  strengthen  their  reserves.  The 
credit  system  began  to  tremble.  The  question 
asked  with  bated  breath  was.  What  will  happen  if 
the  reserves  of  the  Bank  of  England  are  not  suffi- 
cient to  pay  all  demands  ?  This  inaugurated  the 
panic.  It  was  the  first  modern  panic,  and  in  all 
points  it  was  like  that  of  1893,  and  of  every  one 
in  this  century  of  panics.  There  had  been  incipi- 
ent panics  before,  as  in  1772,  mere  rumblings  of 
the  approaching  storm,  but  the  power  of  the  giant 
bank  was  able  to  quell  them.  Now  a  panic  arose 
which  was  greater  than  that  power. 

It  is  a  piece  of  good  fortune  that  when  the  panic 
of  1793  was  over.  Sir  Francis  Baring,  the  founder 
of  the  house  of  Baring  Brothers  &  Co.,  wrote  a 
book  for  which  the  convidsion  of  1793  was  the 
apology.  It  seemed  to  him  out  of  place  for  a 
banker  to  write  a  book,  but  it  may  be  said  he 
rendered  no  greater  public  service  in  amassing  his 
great  fortune  than  he  did  in  writing  his  small 
book.  It  contains  expert  testimony  by  an  eye- 
witness of  and  participant  in  the  first  panic.  The 
situation  arose  from  the  facts  which  have  just  been 
detailed,  —  the  enormous  increase  of  business,  re- 
quiring a  corresponding  increase  of  currency  and  of 
banking  facilities.    Banking  capital  had  been  easily 


A   CENTURY  OF  PANICS  173 

obtained,  and  the  many  new  banks  organized 
issued  their  notes  freely,  checks  being  compara- 
tively unused.  The  banks  were  well  protected 
with  security,  and  while  credit  was  undisturbed 
business  went  on  swimmingly.  The  notes  out- 
standing were  equivalent  to  banking  deposits  of 
our  day,  and  were  subject  to  the  same  increase  and 
diminution.  A  reserve  of  coin  would  therefore  be 
calculated  on  the  amount  of  notes  outstanding,  as 
it  is  now  on  deposits.  When  a  lack  of  confidence 
was  aroused  by  a  few  failures,  then  note-holders 
began  to  present  the  notes  for  redemption,  and 
soon  the  reserves  of  the  country  banks  ran  so  low 
that  they  were  unable  to  renew  loans  to  their  cus- 
tomers. Money  then  became  so  scarce  that  no  pur- 
chasers could  be  found  for  the  securities,  however 
good,  held  by  the  country  banks.  Failures  in- 
creased in  number,  and  the  country  banks  began 
to  call  on  London  bankers  for  money.  Then 
London  began  to  feel  a  currency  famine.  The 
ability  of  the  banks  of  London  to  pay  their  obli- 
gations in  cash  began  to  be  doubted.  The  lack  of 
confidence  was  directed  toward  the  credit  system. 
Redemption  of  bank  obligations  was  the  one  thing 
desired  by  the  public,  and  that  compelled  the 
banks  to  force  liquidations  on  their  debtors  to 
supply  themselves  with  the  guineas.  The  Bank  of 
England  then  as  now  held  the  reserves  of  London 
banks,  and  holders  of  her  notes  began  to  present 
them  for  payment.  "  Then  the  directors,"  writes 
Sir    Francis    Baring,  "  caught    the   panic ;    their 


174  FEDERAL   CLEARING  HOUSES 

nerves  could  not  stand  the  daily  and  constant 
demand  for  guineas  —  and  for  the  purpose  of 
checking  the  demand  they  curtailed  their  discounts 
to  a  point  never  before  experienced.  .  .  .  Their 
deter  mm  ation  and  the  extent  to  which  it  was  car- 
ried came  like  an  electric  shock,"  producing  "  a 
dreadful  convulsion."  Sir  Francis  Baring's  com- 
ment at  this  point  explains  the  whole  difficidty 
in  this  panic  of  1793,  and  in  the  panic  of  1893, 
and  in  every  one  wliich  has  occurred  in  this  cen- 
tury of  panics.  He  writes,  "  In  such  cases  the 
banks  are  not  an  intermediate  body  or  power ; 
there  is  no  resource  on  their  refusal,  for  they  are 
a  dernier  ressort.^^  This  answers  the  question  why 
the  public  were  so  panic-stricken  and  so  eager  to 
draw  their  fmids  from  the  banks.  Their  action 
was  based  on  the  knowledge  that  a  reserve  in  cash 
of  ten,  twenty,  or  thirty  per  cent,  of  deposits  may 
be  sufficient  for  ordinary  times,  but  in  a  panic  that 
percentage  may  all  vanish  in  a  few  days,  and  those 
who  come  last  may  find  the  bank's  doors  closed. 
"  There  is  no  resource  on  their  refusal,"  and  there- 
fore a  panic  under  such  a  system  is  most  logical 
and  rational. 

It  is  evident  that  if  the  panic  is  based  on  the 
fact  that  there  is  "no  resource"  in. the  event  of 
the  refusal  of  the  banks  to  pay,  the  simple  way 
out  of  the  dilemma  is  to  create  a  resource. 

Just  when  universal  bankruptcy  was  threaten- 
ing all  the  commercial  interests  of  England,  Sir 
John    Sinclair  apparently  woke   up   from  a  Eip 


A   CENTURY  OF  PANICS  175 

Van  Winkle  sleep  and  remembered  the  precedent 
of  1696,  nearly  one  centnry  before,  when,  says 
McLeod,  "  Montague  bad  invented  exchequer  bills 
to  sustain  public  credit,  and  [he,  Sinclair]  thought 
a  similar  plan  might  be  followed  in  this  crisis."  ^ 
It  was  recognized  that  the  lack  of  confidence  was 
in  the  credit  system,  and  not  in  a  paper  ciu'rency 
or  in  the  values  of  good  security.  So  a  plan  must 
be  devised  which  will  do  away  with  credit  and  rest 
only  on  absolute  values,  or,  in  other  words,  make 
an  appeal  to  a  higher  power  and  to  an  infallible 
credit. 

The  plan  proposed  by  a  Committee  of  the 
House  of  Commons  and  adojited  by  Parliament 
was  that  a  Board  of  Commissioners  should  be 
appointed  vnth  power  to  issue,  to  approved  appli- 
cants, a  currency  called  commercial  exchequer 
bills,  to  the  extent  of  £5,000,000  sterling,  for  the 
payment  of  which  the  government  was  responsible. 
These  bills  were  to  be  issued  in  making  loans  on 
property  approved  by  the  Board  of  Commissioners 
and  pledged  to  and  held  by  them  as  trustees  for 
the  note-holders  until  the  loans  w^ere  paid,  and  the 
exchequer  bills  canceled.  This  measure  was  a 
complete  success. 

The  duties  of  the  Board  of  Commissioners  were 
almost  identical  with  those  of  a  loan  committee  of 
a  modern  clearing  house,  and  the  exchequer  bills 
with  clearing-house  certificates,  but  the  bills  had 
the  added  advantage  that  they  were  a  currency  for 
1  McLeod's  Theory  of  Credit,  p.  733. 


176  FEDERAL   CLEARING  HOUSES 

general  circulation.  This  points  to  the.  develop- 
ment of  clearing-house  certificates  into  a  clearing- 
house currency. 

Sir  Francis  Baring  writes  thus  of  the  effect  of 
the  commercial  exchequer  biUs  :  "  In  a  space  of 
time  scarcely  credible,  confidence  was  completely 
restored,  money  became  plentiful,  and  the  commis- 
sion was  terminated  with  a  profit  to  the  public 
after  every  expense  had  been  defrayed."  This  has 
also  been  the  experience  of  every  issue  of  clear- 
ing-house certificates.  "  A  small  issue,"  continues 
Baring,  "  relieved  the  universal  distress ;  only 
X2, 100,000  were  issued.  A  single  drop  of  oil 
(and  £2,100,000,  when  compared  with  the  pro- 
perty and  circulation  of  the  country,  is  no  more 
than  a  drop)  withheld  from  the  mainspring  or 
pivot  on  which  a  great  machine  turns  will  dis- 
order the  whole." 

It  is  instructive  to  note  that  John  Wheateny, 
in  his  book  entitled  "  Remarks  on  Currency  and 
Commerce,"  London,  1803,  says  that  m  the  panic 
of  1793  there  were  1304  bankruptcies,  and 
.£3,000,000  of  notes  were  contracted.  So  it  would 
appear  that  Baring's  "  drop  of  oil "  nearly  equaled 
the  notes  contracted,  and  thus  replaced  a  good  part 
of  the  accommodation  which  had  been  curtailed  by 
the  panic.  This  is  in  confirmation  of  the  principle 
that  the  power  to  control  a  panic  must  be  equal  to 
the  money  pressure  caused  by  the  panic. 

Thus  ended  the  panic  of  1793.  Baring  asks, 
''  Why  not  incorporate  another  bank  in  case  the 


A   CENTURY  OF  PANICS  177 

Bank  of  England  could  not  pay  ?  "  It  was  not, 
however,  another  bank  that  was  wanted,  but  a 
cash  system  with  the  idea  of  credit  eliminated. 
The  support  the  credit  system  needs  when  it  is 
tottering  to  its  fall  must  come  from  a  supply  of 
cash  or  tliat  which  is  as  near  as  possible  to  cash. 
That  was  furnished  by  the  commission  which 
issued  a  government  currency  based  on  actual 
values  held  by  the  commission  as  trustees  for  the 
note-holders.  The  element  of  credit  enters  into  a 
currency  so  issued  about  as  little  as  it  does  in  a 
metallic  currency,  wliich  is  accepted  at  its  face 
value  because  it  is  stamped  by  the  government  at 
its  intrinsic  value.  The  principle  is  that  when 
the  credit  system  breaks  down  or  is  endangered,  it 
can  be  fully  supported  only  by  actual  cash,  or  by 
currency  concerning  which  there  is  no  doubt. 

The  credit  currency  or  money,  which  has  been 
contracted  or  destroyed,  must  be  replaced  by  a 
cash  currency  which  does  not  rest  on  credit.  The 
coin  of  the  government  or  j)aper  currency  with 
absolute  security  and  ample  guaranties  behind  it, 
then,  is  the  only  resource.  Additional  issues  by 
banks,  even  if  by  the  Bank  of  England,  become  of 
no  avail  at  such  a  time.  If  the  banks  are  inde- 
pendent, and  each  relies  on  its  own  reserves  for 
solvency  and  are  a  ''  last  resort,"  they  must  stand 
alone,  and  if  one  falls,  the  momentum  is  commu- 
nicated to  another,  as  if  they  were  a  row  of  bricks. 
Then  it  is  that  a  trusteeship  meets  the  emergency 
by  the  confidence  it  inspires  by  satisfying  every  one 


178  FEDERAL   CLEARING  HOUSES 

that  the  currency  issued  thereunder  is  not  based 
on  credit  but  on  actual  property,  and  that  the  rea- 
sons for  distrust  in  a  credit  currency  do  not  apply 
to  tliis.  The  commercial  exchequer  bills  were  no 
more  than  government  notes  loaned  to  private 
parties  on  security  under  the  supervision  of  a 
board  of  control  whose  sagacity  and  faithfulness 
were  above  suspicion.  A  board  so  constituted  and 
regulated  could  issue  currency  in  any  reasonable 
amount  and  grant  all  the  accommodations  wanted 
to  satisfy  the  needs  of  all  solvent  borrowers. 

This  idea  of  a  government  board  has  appeared 
and  reappeared  in  various  forms  from  time  to 
time  before  and  since  the  panic  of  1793,  and  ap- 
parently suggested  by  the  success  of  that  operation 
and  its  original  in  1696.  Notable  among  these 
suggestions  is  that  made  in  1842  during  President 
Tyler's  achninistration,  of  which  Webster,  then 
Secretary  of  State,  was  the  chief  advocate,  if  not 
the  originator.  The  message  presenting  this  plan- 
to  Congress  was  one  of  great  power,  and  reflects 
credit  on  American  statesman sliip.  It  was  a 
scheme  by  which  a  board  of  exchequer  was  to  be 
appointed  in  connection  with  the  Treasury  Depart- 
ment with  power  to  buy  and  sell  exchange  and  to 
issue  government  notes  for  that  and  other  com- 
mercial purposes,  in  effect  making  loans  on  accept- 
able collateral  security  to  the  extent  of  115,000,000. 
By  this  means  Webster  thought  exchanges  could 
be  kept  at  moderate  cost,  or  in  other  words  the  ex- 
chequer bills  would  be  at  par  all  over  the  country. 


A    CENTURY  OF  PANICS  179 

Webster  said  that  the  subject  of  currency  had 
been  the  study  of  his  life,  and  he  had  read  every- 
thing of  vahie  that  had  been  published  on  both 
sides  of  the  Atlantic.  It  is  therefore  hardly  pos- 
sible that  he  did  not  get  his  exchequer  plan  from 
the  panic  of  1793.  He  said  in  his  speech  at  Bos- 
ton, September  30,  1842,  "  I  believe  tlie  plan  for 
an  exchequer  as  presented  to  Congress  at  its  last 
session  [the  2d  Session  of  the  27th  Congress] 
is  the  best  measure,  the  only  measure  for  the 
adoption  of  Congress  and  the  trial  of  the  people. 
I  am  ready  to  stake  my  reputation  that  if  this 
Whig  Congress  wiU  take  that  measure  and  give  it 
a  fair  trial,  within  three  years  it  will  be  admitted 
by  the  whole  American  people  to  be  the  most 
beneficial  measure  of  any  sort  ever  adopted  in  this 
country,  the  Constitution  only  excepted."  This 
would  not  be  extravagant  praise  for  a  perfect 
banking  system,  and  whenever  that  is  constructed 
it  will  take  its  place  alongside  of  the  Constitution 
in  its  beneficent  effects  upon  our  country.  But 
the  desire  to  keep  the  government  out  of  the  bank- 
ing business  prevailed,  and  Webster's  exchequer 
plan  was  never  tried.  For  an  emergency  such  a 
plan  might  work  successfully  in  this  country,  as  it 
did  in  England  in  1696  and  1793,  but  as  a  con- 
tinuous branch  of  the  Treasury  Department  it 
would  be  too  liable  to  abuse  and  consequent  loss 
and  scandal  to  the  government. 

The  objections  to  the  plan  as  a  part  of  the  gov- 
ernment do  not  hold  as  against  private  enterprise, 


180  FEDERAL   CLEARING  HOUSES 

and  if  the  same  operation  was  conducted  through 
the  agency  of  the  banks  as  represented  in  the 
clearing  houses,  as  has  been  done  safely  in  the 
issue  of  clearing-house  certificates,  with  the  lia- 
bility of  the  banks  in  place  of  the  responsibility 
of  the  government,  the  plan  would  be  free  from 
objection  and  would  accomplish  all  that  Webster 
so  confidently  hoped  from  his  plan  for  an  ex- 
chequer. 

A  similar  suggestion  has  been  frequently  made 
by  less  prominent  persons.  A  book  published  in 
1706,  entitled  "Discourse  on  a  Land  Bank,"  pro- 
poses a  board  of  commissioners  and  directors  to 
receive  title  to  real  estate  and  issue  currency 
thereon,  and  that  the  "  bills  "  thus  issued  "  shall 
pass  as  the  lawful  coin  of  the  kingdom."  The 
principle  of  a  trustee  for  the  currency  was  sound, 
but  the  security  was  not  suitable,  which  should  be 
what  is  called  "  the  liquidated  wealth "  of  the 
country.  This  idea  was  no  doubt  taken  from 
Montague's  expedient  employed  in  1696. 

William  Blacker,  London,  1839,  in  his  book 
on  "  A  Mixed  Currency,"  etc.,  advocates  an  issue 
by  commissioners  appointed  by  Parliament  of  a 
national  currency  secured  by  mercantile  paper,  en- 
dorsed by  the  banks,  which  is  sure  to  be  withdrawn 
at  the  maturity  thereof.  "  No  paper,"  he  says 
truly,  "  would  remain  in  circulation  beyond  what 
was  absolutely  needed  to  carry  on  the  commercial 
transactions  of  the  country."  "  The  existing  laws 
force  the  Bank  of  England  to  sacrifice  both  mer- 


A   CENTURY  OF  PANICS  181 

chants  and  manufacturers  for  the  preservation  of 
its  own  existence."  His  proposition  would  provide 
a  resom^ce  which  would  protect  conunercial  credit. 

In  one  of  the  tracts  of  McCulloch's  collection 
entitled  "Thoughts  on  the  Currency,"  London, 
1842,  the  writer  proposes  that  commissioners 
shall  be  appointed  by  Parliament  who  shall  issue  a 
national  currency.  The  commissioners  were  to 
divide  the  country  into  districts,  so  that  all  may 
have  the  benefits  of  the  system. 

John  Wade,  in  his  "  Principles  of  Money,"  Lon- 
don, 1842,  advocates  a  National  Board  of  Circula- 
tion. 

In  a  letter  to  Sir  Robert  Peel  published  in  Lon- 
don, in  1848,  the  wi-iter  advocates  "  a  properly  con- 
stituted permanent  board  "  to  superintend  issues 
of  currency. 

Edward  Norton,  London,  1867,  in  his  book  en- 
titled "  National  Finance  and  Currency,"  proposes 
the  creation  of  a  "  Council  of  Finance  of  the  high- 
est construction,"  of  twenty-one  members,  from  the 
Chancellor  of  the  Exchequer  down  to  a  humble 
merchant,  which  council  should  have  power  to  issue 
currency  and  hold  securities  as  collateral  therefor. 

H.  Bowlby  Willson,  London,  1874,  would  create 
a  Currency  Board,  but  does  not  work  out  the 
plan. 

The  issue  of  clearing-house  certificates  in  this 
counti;y,  which  experience  has  shown  to  be  correct 
in  principle  and  safe  and  effective  in  practice,  is 
based  on  the  same  idea  as  were  the  exchequer  bills 


182  FEDERAL   CLEARING  HOUSES 

of  1696  and  1793, — that  when  the  credit  system 
breaks  down  it  must  be  supj^orted  by  a  currency 
of  undoubted  credit  that  will  be  accepted  every- 
where as  cash,  and  to  be  effective  the  support  must 
be  equal  to  the  strain. 

It  was  chiefly  in  view  of  the  panic  of  1793  and 
the  suspension  of  1797,  that  the  Parliamentary 
Commission  was  appointed  from  whom  emanated 
the  celebrated  Bullion  Report  of  1810.  The  mode 
of  dealing  with  panics  which  they  laid  down  was 
that  "an  enlarged  accommodation  is  the  true 
remedy  for  that  occasional  failure  of  confidence  to 
which  our  system  of  paper  credit  is  unavoidably 
exposed."  This  is  the  evident  and  natural  deduc- 
tion from  the  success  of  the  issue  of  an  undoubted 
currency,  amply  secured  by  values  in  the  hands 
of  trustees,  who  in  1793  were  the  Paiiiamentary 
Board  of  Commissioners.  But  the  Bullion  Report 
laid  the  chief  emphasis  on  the  "  enlarged  accom- 
modation "  and  not  on  the  appeal  from  the  credit 
system  to  a  cash  system. 

It  is  almost  a  platitude  in  these  days  to  say 
that  an  enlarged  accommodation  is  the  remedy  for 
a  panic,  but  it  was  not  so  at  the  time  it  was  said 
by  the  Bullion  Committee. 

But  it  is  another  step  in  the  development  of  the 
diagnosis  to  say  that  when  the  credit  system  breaks 
down,  it  should  be  protected  and  supported  by  an 
appeal  to  a  higher  system  possessing  a  stronger 
credit.  An  enlarged  acconunodation  could  not  be 
given  by  banks  operating  under  the  credit  system, 


A   CENTURY  OF  PANICS  183 

for  that  would  be  in  a  state  of  collapse.  Notes 
issued  by  the  credit  banks  would  be  immediately 
returned.  Professor  Sumner,  in  commenting  on 
this  passage,  said :  "  The  rule  of  the  Bidlion  Com- 
mittee contemplated  the  loan  of  notes  .  .  .  whose 
credit  cannot  fail  in  the  wildest  panic."  The 
Bullion  Report  did  not  say  how  they  were  to  be 
issued ;  they  only  commended  their  issue.  The 
plan  of  a  currency  issued  by  trustees  who  should 
hold  the  security  for  the  notes  was  not  discussed 
in  their  report. 

The  lessons  of  the  panic  of  1793  were  there- 
fore ;  — 

First.  An  enlarged  accommodation  is  the  true 
remedy  for  a  panic. 

Second.  The  amount  of  the  accommodation  must 
be  sufficient  to  meet  and  overcome  the  money  pres- 
sure. 

Third.  The  credit  of  the  notes  issued  must  be 
good  in  the  wildest  panic. 

From  the  panic  of  1793  we  start  on  our  pro- 
gress down  through  the  century  of  panics.  A 
system  of  individual,  unsupported,  midtiple  banks 
in  England  and  America  went  crashing  on  its  way 
like  a  huge  behemoth  over  cultivated  fields,  leav- 
ing destruction  and  disaster  in  its  path.  Since 
1793  panics  have  occurred  in  the  following  years : 
1797,  1811,  1813,  1816,  1819, 1825,  1837,  1847, 
1857,  1866,  1873,  1884,  1890,  and  1893.  The 
true  name  for  a  system  with  this  record  is  the 
panic  system. 


184  FEDERAL   CLEARING  HOUSES 

A  distinction  must  be  made  between  monetary 
panics,  which  come  from  a  lack  of  confidence  in  the 
credit  system,  and  commercial  panics,  which  are 
caused  by  unfortunate  speculations.  These  last 
are  limited  in  their  cause,  area,  and  effect,  while 
the  former  are  universal. 

A  monetary  panic  is  the  result  of  a  lack  of  con- 
fidence in  the  credit  system  when  accompanied  by 
a  low  state  of  cash  reserves.  A  panic  cannot 
occur  with  a  high  state  of  reserves.  A  low  state 
of  reserves  is  usually  caused  by  some  alarming 
event.  Statements  of  the  condition  of  the  Bank 
of  England  prove  this,  but  they  were  rarely  pub- 
lished until  recent  years.  From  statements  sub- 
mitted to  Parliament  the  following  information 
regarding  its  reserves  is  gathered.  In  1696  the 
currency  famine  reduced  the  reserve  of  the  Bank 
of  England  so  that  on  November  10,  1696,  it  was 
2.151  per  cent,  of  its  obligations,  and  the  result 
was  a  suspension  of  specie  payments.  In  1797 
the  war  with  France  reduced  the  cash  reserve  to 
7.887  per  cent,  of  its  obligations,  and  the  suspen- 
sion followed  which  lasted  for  26  years.  In  1825 
the  locking  up  of  money  in  unproductive  enter- 
prises caused  a  demand  which  reduced  the  bank's 
reserve  to  4  jier  cent.,  and  the  panic  of  that  year 
followed. 

Lord  Ashburton,  writing  in  1847  of  this  panic, 
said,  "  The  gold  of  the  bank  was  drained  to 
within  a  very  few  thousand  pounds,  for  although 
the  public    returns   showed   a    result    rather   less 


A   CENTURY  OF  PANICS  185 

scandalous,  a  certain  Saturday  night  closed  with 
nothing  worth  mentioning  remaining." 

J.  Laurie  Murray  in  a  letter  (1847)  to  Charles 
Wood,  then  Chancellor  of  the  Exchequer,  said, 
"  The  present  [1847]  is  not  a  bullion  panic,  but 
one  founded  on  the  reduced  amount  of  the  reserve, 
and  the  inability  of  the  bank  to  aid  the  public." 

In  1857  the  depreciation  of  railway  investments 
caused  a  demand  for  cash  which  reduced  the 
Bank's  reserve  to  1.927  per  cent,  of  its  notes  and 
deposits,  and  the  panic  of  that  year  was  the  neces- 
sary sequence.  These  reserves  were  "miserably 
low  "  in  themselves,  but  still  more  so  when  it  is 
remembered  that  the  Bank  of  England  holds  the 
reserves  for  the  entire  English  nation. 

The  Parliamentary  Commission  of  1857,  ap- 
pointed to  examine  into  the  panic  of  that  year, 
brought  in  a  recommendation  that  "  new  provision 
be  made  in  advance  for  such  contingencies  [as 
panics]  and  the  conditions  be  expressly  laid  down 
on  which  the  issue  of  an  increased  number  of  bank 
notes  may  in  the  time  of  pressure  be  allowed." 
This  is  such  a  plain  and  sensible  suggestion,  it 
would  seem  surprising  that  Parliament  has  never 
acted  on  it. 

Each  one  of  the  fourteen  or  more  panics  which 
occurred  between  1793  and  1893  maybe  taken  up 
by  itseK  and  examined,  and  the  deductions  there- 
from will  always  be  the  same  as  in  the  first  j)anic 
of  1793.  If  the  credit  banks  had  not  been  a 
dernier  ressort,  if  a  source  had  been  in  existence 


186  FEDERAL  CLEARING  HOUSES 

established  by  law  for  the  issue  of  a  solid  currency, 
and  the  loan  thereof  to  solvent  parties,  to  an 
amount  equal  to  the  money  pressure,  all  this 
dreadful  list  of  panics  with  their  untold  miseries, 
so  far  as  they  were  caused  by  currency  famines,  — 
and  that  was  their  chief  cause, —  could  have  been 
avoided. 

Every  monetary  panic  necessitates  the  closing  of 
many  business  transactions,  the  cancellation  of  an 
equal  amount  of  credit,  and  a  consequent  diminu- 
tion of  the  amount  of  money  in  the  hands  of  the 
business  community,  or  for  which  they  can  draw. 
It  is  on  the  regularity  and  stability  of  this  supply 
of  credit  money  that  the  successful  prosecution  of 
business  depends. 

Enoiish  bankers  and  financial  writers  are  now 
fidly  aware  of  the  wealmess  of  their  bank  reserves 
when  compared  with  the  stram  to  which  they  are 
liable.  Their  dependence  on  loans  from  the  Bank 
of  France  is  humiliating.  A  ^^Titer  in  the  ''  Quar- 
terly Review"  for  July,  1899,  asks,  "  Has  the  Bank 
of  England  ever  been  in  a  position  to  render  a 
reciprocal  service  ?  Could  it  even  at  any  ordinary 
time  have  lent  the  Bank  of  France  three  millions 
sterling  ?  "  This  is  the  amount  borrowed  by  the 
Bank  of  England  from  the  Bank  of  France  during 
the  Baring  panic. 

We  naturally  ask  why  a  remedy  for  panics  has 
not  been  found  in  England  and  America  as  it 
has  been  in  France  and  Germany.  The  Imperial 
Bank  of  Germany,  since  1875,  has  had  the  power 


A   CENTURY  OF  PANICS  187 

to  issue  notes  without  limit.  Its  connection  with 
the  government  and  its  virtual  monopoly  makes  this 
currency  of  undoubted  credit.  So  m  France,  the 
Bank  of  France  carries  the  enormous  reserve  of 
over  $600,000,000  in  gold  and  silver  with  which 
it  is  free  to  support  the  hanks  of  France.  Con- 
sequently in  France  and  Germany  they  do  not  have 
panics. 

We  ask.  Why  do  we  not  in  England  and  Amer- 
ica adopt  similar  methods,  and  thus  stay  the  rav- 
ages of  panics  ?  The  answer  in  part  is  because 
high  authorities  like  David  Ricardo  have  held  that 
"  against  a  general  panic,  banks  have  no  security 
under  any  system,"  and  this  opinion  has  been  ac- 
cepted as  indisputable  by  the  Anglo-Saxon  business 
community  generally.  Ricardo  instead  of  bewail- 
ing that  there  is  no  security  should  have  set  to 
work  to  make  one.  He  had  the  example  of  the 
Act  of  Parliament  in  1793  to  guide  him  in  the 
right  way  to  secure  that  end.  But  his  dogmatic 
assertion  beclouded  his  mind  and  led  him  astray 
and  all  his  followers  with  him. 

The  answer  also  in  part  is  that  the  Anglo-Saxon 
will  not  permit  a  monopoly,  and  it  has  seemed  to 
our  lawmakers  that  no  method  has  yet  been  pro- 
posed to  grant  the  power  of  issue  of  a  higher 
grade  of  currency  without  granting  a  monopoly 
as  well.  Independence  and  self-reliance  are  innate 
in  Anglo-Saxon  blood,  and  the  evils  of  panics  are 
endured  rather  than  surrender  these  bulwarks  of 
liberty.     It  is  evident,  however,  that  the  incorpo- 


188  FEDERAL   CLEARING  HOUSES 

ration  of  clearing  houses  under  a  general  federal 
law,  with  power  to  suj)port  the  credit  system  with 
a  trustee  currency,  would  be  in  harmony  with  our 
institutions  and  would  afford  the  protection  needed. 
This  currency  would  be  similar  to  the  issue  of  ex- 
chequer bills  by  Montague  in  1696,  and  identical 
with  those  issued  by  the  Parliamentary  Commis- 
sion in  1793.  The  mode  of  issue  has  been  suc- 
cessfully practiced  in  a  limited  way  by  the  New 
York  Clearing  House  for  about  forty  years,  and  by 
many  other  clearing  houses  in  other  cities  for  a  lesser 
time.  Having  been  successfully  operated  for  one 
hundred  years,  may  it  not  be  permissible  now  to  say 
that  it  is  no  longer  an  experiment  ? 

We  are  entering  upon  a  third  century  in  the 
history  of  the  credit  system.  Will  it  also  be  a 
century  of  panics,  or  will  an  intelligent  plan  be 
adopted  in  England  and  America  by  which  these 
evils  will  be  mitigated  if  not  entirely  avoided  by 
providing  an  efficient  support  to  the  credit  system  ? 
The  result  would  be  to  protect  the  business  com- 
munity from  sudden  diminution  of  the  credit  money 
of  the  country,  which  is  the  cause  of  monetary 
panics. 

The  credit  system  began  two  centuries  ago  to 
try  to  do  business  on  a  reserve  of  two  per  cent. 
The  latest  national  banking  system  is  that  of  Ger- 
many, which  in  effect  provides  a  reserve  of  one  hun- 
dred per  cent.  Thus  the  progress  has  been  towards 
stability.  Let  us  hope  that  the  56th  Congress  will 
legislate  in  the  same  direction. 


VI 


A     FINANCIAL    OBJECT    LESSON    FROM    THE    WAR 
WITH    SPAIN 

Part  I.     The  Forecast 

The  possibility  of  a  war  with  Spain  has  led 
our  government  to  examine  into  the  condition 
of  our  army  and  navy  to  ascertain  what  is  needed 
to  place  these  departments  on  a  war  footing,  and 
a  similar  inquiry  should  be  made  in  regard  to  our 
banking  system. 

The  country  has  been  startled  to  learn  how 
much  needs  to  be  done  to  enable  this  country  to 
cope  even  with  a  third-rate  power.  Congress  is 
promptly  meeting  the  emergency  by  authorizing 
the  expenditures  called  for  by  the  army  and  navy, 
and  in  the  same  spirit  laws  should  be  enacted  to 
reform  our  banking  system  so  that  it  may  be  able 
to  protect  commerce  and  sustain  values  even  in  the 
face  of  a  declaration  of  war.  The  strengthening 
of  our  banking  system  is  even  a  more  important 
matter  than  the  preparations  for  the  defense  of 
our  coast  Hue  bordered  with  rich  cities,  because  it 
affects  the  entire  country,  with  its  estimated  160,- 
000,000,000  of  property.  The  defense  of  values 
and  of  commerce   is  the  work   and  duty  of   our 


190  FEDERAL   CLEARING  HOUSES 

banking  system  alone ;  and  if  we  are  sure  that  it 
has  power  to  meet  all  shocks,  even  that  of  the 
declaration  of  war,  then  one  of  our  great  sources 
of  anxiety,  if  not  the  greatest,  will  be  removed. 

Money  is  the  sinews  of  war,  and  if  those  sinews 
are  paralyzed  the  combatant  is  handicapped  at  the 
start.  We  all  know  that  war  would  impose  a  bur- 
den on  our  banks  which  they  could  bear  only  with 
the  greatest  difficulty.  From  our  experiences  in 
the  last  few  years  we  lack  confidence  in  the  ability 
of  our  banking  system  to  sustain  the  country  in  an 
emergency,  and  we  anticipate  that  a  declaration  of 
war  would  be  followed  by  a  panic  in  all  markets, 
both  financial  and  commercial. 

CALLING  BACK  GOLD  FROM  EUROPE 

To  strengthen  themselves  against  these  chances 
of  war  our  banks  are  now  calling  gold  back  from 
Europe,  just  as  they  did  in  1860  and  1861,  and 
later  in  1873  and  in  1893  and  at  other  times, 
but  in  none  of  those  instances  was  the  amount  of 
imported  gold  sufficient  to  ward  off  disaster,  nor  is 
it  sufficient  at  the  present  time  to  protect  the  vast 
obligations  of  New  York  to  the  rest  of  the  country 
if  war  is  declared.  A  glance  at  the  situation  re- 
veals this.  The  deposits  of  New  York  banks  are, 
in  round  numbers,  1680,000,000.  They  hold  a 
reserve  above  legal  requirements  of  about  f30,- 
000,000  gold.  This  is  4.4  per  cent,  of  their 
deposits,  and  if  that  small  percentage  should  be 
called  for  by  depositors  the  banks  of  New  York 


THE   WAR   WITH  SPAIN  191 

would  be  powerless  to  assist  the  country  or  to  pay 
to  country  banks  their  deposit  reserves,  which 
form  a  large  part  of  the  remaining  cash  reserves. 

The  amount  of  gold  now  being  unported  seems 
large,  in  itself  considered ;  but  when  compared  to 
the  total  deposits  of  New  York  banks  it  dwindles 
to  only  another  4.4  per  cent. ;  and  by  the  time 
it  arrives,  if  war  should  be  declared,  it  will  all 
be  wanted  by  correspondents  all  over  the  country, 
and  will  have  disappeared. 

The  importations  of  gold  should  be  looked  after 
principally  with  reference  to  the  needs  of  the 
entire  country,  of  which  New  York  is  the  repre- 
sentative. Compared  with  the  $3,000,000,000 
to  14,000,000,000  of  banking  deposits  of  the 
country,  the  inadequacy  of  importation  of  gold  to 
relieve  stringency,  meet  demands  of  depositors, 
and  support  commercial  credit  becomes  at  once 
apparent.  This  statement  is  sufficient  to  establish 
the  correctness  of  the  conclusion  that  gold  impor- 
tations are  an  inadequate  resource,  and  we  have 
also  experience  of  the  results  of  importations  of 
gold  in  previous  years,  all  of  which  should  con- 
vince even  the  firmest  believer  in  tliis  method  of 
giving  stability  to  our  finances  that  it  is  in- 
sufficient. 

Not  only  are  the  banks  of  New  York  in  a  condi- 
tion unprotected  against  sudden  failures  of  confi- 
dence, but  an  examination  of  cash  reserves  shows 
that  all  the  banks  of  our  country  are  in  a  simi- 
lar condition.      The   thirty-four  hundred  country 


192  FEDERAL  CLEARING  HOUSES 

national  banks  hold  cash  reserves  of  only  about  fif- 
teen per  cent,  of  their  deposits.  The  eighty-two 
hundred  national,  state,  and  private  banks,  com- 
prising all  the  commercial  banks  of  the  country, 
hold  less  than  twenty  per  cent,  of  cash  as  a  reserve. 

TWO    DANGEROUS    FEATUEES 

These  reserves  are  small  in  themselves,  and 
there  are  two  features  of  our  banking  system 
which  make  them  specially  dangerous  to  the  com- 
merce and  property  of  the  citizens  of  the  United 
States.  One  is  that  this  is  all  the  cash  reserves 
which  the  banks  have,  and  there  is  no  provision 
in  the  banking  laws  for  any  further  protection  to 
commerce  and  credit,  except  by  forcing  Hquida- 
tions  ;  and  the  second  is  that  when  a  slight  de- 
cHne  in  the  reserve  takes  place  the  National  Bank- 
ing Act  forbids  any  fresh  discounts  until  the  reserve 
is  restored,  and  if  that  is  not  accomplished  in 
thirty  days  a  receiver  may  be  appointed  for  the 
delinquent  bank.  The  passing  over  this  dead-line 
inaugurates  a  panic. 

These  features  of  the  banking  system  of  our 
country  make  it  peculiarly  liable  to  panics  and 
spasms  of  apprehension.  The  question  is,  What 
woidd  be  the  effect  on  our  country  with  such  a 
banking  system  if  a  declaration  of  war  were  made  ? 
Even  the  expectation  of  a  declaration  of  war  is  a 
siirnal  of  a  disturbance  which  causes  untold  losses 
of  property.  Banks  cannot  support  business,  but 
are  obliged  to  take  care  of  themselves  and  augment 


THE   WAR   WITH  SPAIN  193 

their  small  reserves  as  best  they  can  by  competing 
with  each  other  for  the  floating  cash. 

The  first  effect  of  a  declaration  of  war  would 
therefore  be  the  infliction  of  a  great  catastrophe 
on  our  own  people.  This  condition  of  affairs  is 
caused  not  so  much  by  the  smallness  of  the  re- 
serves as  by  the  fact  that  there  is  no  provision  in 
our  banking  system  for  the  protection  of  banking 
and  commercial  credit  when  reserves  are  imj^aired. 
Our  reserves  are  sufficient  for  ordinary  times,  but 
they  are  not  sufficient  for  emergencies. 

This  difficulty  can  be  cured  in  the  simplest 
manner  by,  first,  the  incorporation  of  our  clear- 
ing houses  under  a  federal  law ;  and,  second,  by 
giving  to  at  least  one  in  each  State  the  power  to 
issue  a  clearing-house  currency  on  pledge  of  bank 
assets  at  seventy-five  per  cent  of  their  value  to 
any  bank  member,  the  currency  to  be  good  at  any 
clearing  house. 

A    CREDIT    CURRENCY    ISSUE 

That  a  provision  by  law  for  the  issue  of  a  credit 
currency  will  accomplish  the  object  of  giving  sta- 
bility to  a  nation's  commerce  under  stress  of  pan- 
icky conditions  is  shown  by  the  example  of  Ger- 
many, whose  banking  law  confers  the  power  of 
issue  on  a  few  of  its  largest  banks.  This  law  has 
prevented  panics  in  that  nation  for  over  twenty 
years.  A  similar  law  in  our  country  would  do  the 
same  for  us. 

Wliile  the  possibility  of  a  war  is  before  us  it 


194  FEDERAL  CLEARING  HOUSES 

behooves  our  legislators  to  reform  our  banking 
system  to  make  it  strong  enough  to  withstand  the 
shock  which  a  declaration  of  war  would  give. 

It  would  be  folly  to  provide  a  navy  of  wooden 
ships,  and  therefore  we  build  or  buy  only  armored 
vessels.  We  make  the  thickness  of  the  plates  to 
correspond  to  the  weight  and  power  of  modern  pro- 
jectiles. We  build  forts  with  solid  earthen  em- 
bankments, so  that  nothing  can  throw  them  down. 
Old-fashioned  wooden  ships  and  brick  forts  may 
be  compared  to  our  present  banking  system.  They 
would  go  down  before  the  first  attack,  and  the 
worst  defeat  of  any  war  we  might  engage  in  would 
be  when  our  commerce  would  be  prostrated  at  the 
first  assault  on  our  banking  system  following  the 
act  of  our  own  government  in  declaring  war.  The 
banking  system  is  the  only  protection  for  all  the 
property  of  our  country,  and  the  instant  necessity 
for  placing  it  on  a  war  footing  should  be  recog- 
nized by  all  business  men. 

No  change  in  our  national  banking  law  is  re- 
quired, only  the  passage  of  a  bill,  like  the  one  now 
before  Congress,  incorporating  clearing  houses, 
and  giving  them  the  power  to  issue  a  safe  credit 
currency  to  protect  and  support  commercial  credit. 
This  would  modernize  our  banking  system  and 
make  it  an  efficient  support  to  the  government  in 
its  preparation  for  war,  and  a  protection  to  the 
people  if  that  event  should  come  to  pass. 

March  19,  1898. 


THE   WAR    WITH  SPAIN  195 

Part   II.     The   Retrospect 

Whether  the  late  financial  disturbance  occa- 
sioned by  the  war  with  Spain  ever  rose  to  the  dig- 
nity of  a  first-class  panic  may  be  doubted.  It  is 
relatively  as  short  of  attaining  that  importance  as 
the  war  is  of  being  a  first-class  war.  The  appre- 
hension which  many  felt  at  the  period  of  the  great- 
est depression,  which  culminated  during  the  last 
ten  days  of  March,  was  happily  disappointed  in 
the  early  discovery,  as  the  weeks  passed  by,  that 
our  opponent  was  not  as  we  supposed  a  foeman 
worthy  of  our  steel,  but  a  "  decrepit  gentlemanly 
roue,"  whom  it  was  a  regrettable,  rather  than  a 
difficult,  task  for  a  young  athlete  like  the  United 
States  to  be  obliged  to  knock  into  insensibility. 

The  feeling  of  apprehension  having  now  sub- 
sided, and  the  financial  disturbance  caused  by  the 
war  being  about  over,  its  stages  and  effects  can  be 
critically  examined,  and  remedies  to  enable  the 
business  community  to  bear  similar  strains  with 
greater  ease  may  be  profitably  discussed. 

The  war  has  taught  us  the  necessity  of  raising 
our  army  and  navy  to  a  higher  state  of  efficiency, 
and  it  has  its  lesson  also  in  the  same  direction  for 
the  financial  world. 

The  spasm  may  be  divided  into  its  acute  and 
chronic  phases.  The  sinking  of  the  Maine  took 
place  on  the  15th  of  February.  The  acute  condi- 
tion culminated  during  the  last  ten  days  of  March, 
when  stocks  decHned  from  10  to  20  per  cent.,  good 


196  FEDERAL   CLEARING  HOUSES 

bonds  from  5  to  10  per  cent.,  and  money  rose  to 
sharp  6  per  cent,  for  all  dates  in  New  York,  and 
to  7}  or  more  at  other  centres,  and  was  practically 
not  to  be  had.  The  chronic  condition  cuhninated 
on  the  30th  of  April,  when  deposits  of  New  York 
banks  reached  their  lowest  point  and  began  to  m- 
crease,  and  when  rates  for  money  on  call  fell  to  2 
per  cent,  again. 

Up  to  the  15th  of  February,  the  banks  of  New 
York  had  been  loaning  and  investing  freely,  and 
their  deposits  then  stood  at  the  high  figure  of 
1738,600,000,  but  their  surplus  reserve  above 
legal  requirements  was  only  132,400,000,  or  4.4 
per  cent,  of  deposits.  This  must  be  recognized  as 
a  weak  condition,  unless  the  banks  had  other  re- 
sources besides  their  cash  to  meet  demands  from 
depositors. 

They  had  two  resources,  and  both  were  at  the 
expense  of  the  commercial  community.  One  was 
the  importation  of  gold,  with  all  the  derangement 
of  the  foreign  exchange  market  and  restriction 
of  importations  which  followed  and  may  continue 
for  months  to  come.  The  other  was  the  cessation 
of  discounts  and  calling  of  loans  with  the  forced 
liquidations  and  losses  which  that  involves. 

From  the  11th  of  February  to  the  30th  of  April 
the  importations  of  gold  at  New  York  were  |58,- 
000,000,  but  this  amount  and  18,000,000  more 
from  the  lawful  money  reserve  was  absorbed  by 
the  demand  for  currency  from  out  of  town  banks 
and  for  hoarding  purposes.      The   la^vful  money 


THE   WAR    WITH  SPAIN  197 

reserve  was  reduced  from  1217,000,000  to  1209,- 
130,000. 

During  the  same  time  loans  decreased  §69,600- 
000.  So  in  this  short  time  we  see  there  was  a 
diminution  of  business  which  must  at  least  be 
equal  to  the  importations  of  gold  and  the  reduc- 
tion of  the  lawful  money  reserve  and  of  loans, 
added  together,  or  1135,500,000. 

This  action  of  the  banks  was  a  central  impulse 
which  set  in  motion  a  series  of  liquidations  in 
widening  concentric  circles,  until  the  whole  busi- 
ness community  was  affected.  Merchants,  brokers, 
commission  houses,  dealers,  and  manufacturers,  all 
felt  the  restriction,  and  in  some  instances  even  the 
laborer  was  reached. 

There  was  a  still  larger  restriction  of  business 
from  the  checking  of  enterprises  of  which  the  con- 
traction of  banking  facilities  was  only  the  surface 
indication.  Thus  a  greater  loss  was  self-inflicted 
on  the  business  of  the  country  than  has  resulted 
from  any  other  event  of  the  war.  The  demand 
for  currency  was  entirely  for  home  use,  and  might 
have  been  met  and  satisfied  by  a  sound  credit  cur- 
rency issued  by  the  banks. 

During  the  same  time,  there  was  a  reduction  in 
deposits  of  §80,000,000 ;  and  as  the  reduction  in 
lawful  money  reserve  was  only  §8,000,000,  a  rise 
resulted  in  the  percentage  of  the  surplus  reserve 
from  4.4  to  6.75  per  cent,  of  deposits.  This  still 
was  not  a  strong  position  for  banks  under  a  com- 
petitive system  ;  but  the  weakness  of  Spain  had 


198  FEDERAL  CLEARING  HOUSES 

meanwhile  become  apparent,  and  public  confidence 
in  tlie  able  management  of  affairs  by  President 
McKinley  and  in  the  patriotism  of  Congress,  and 
in  the  success  of  our  army  and  navy,  had  so  in- 
creased, that  anxiety  was  well-nigh  entirely  re- 
moved. So  the  state  of  affairs,  in  a  word,  was 
that  up  to  the  15th  of  February  all  the  banks 
were  encouraging  the  business  community  to  bor- 
row money  and  were  lending  up  to  and  some  would 
say  beyond  the  limits  of  prudence,  and  then  for 
two  months  and  a  half  thereafter  they  stopped 
lending  and  discounting,  and  withdrew  banking 
facilities  from  the  general  public.  So  it  came 
to  pass  that  the  banks  forced  liquidations  on  the 
very  parties  they  had  before  been  encouraging  to 
borrow,  to  an  amount  which  may  be  estimated  at 
1135,500,000. 

It  is  evident  that  the  banks  did  not  bear  any 
part  of  the  loss  of  this  liquidation  ;  the  whole  bur- 
den was  thrown  on  the  mercantile  community.  At 
the  very  time  the  best  investment  stocks  had  de- 
clined ten  per  cent,  or  more,  the  stock  of  one  of 
our  New  York  banks  sold  at  an  advance  of  ten 
per  cent,  above  any  previous  sale. 

The  banks,  having,  at  the  present  time,  recov- 
ered from  their  apprehension,  they  are  again  be- 
ginning the  old  routine  of  encouraging  borrowers 
to  take  money  by  offering  it  at  low  rates  on  call, 
and  are  competing  with  each  other  for  the  best 
paper  at  a  less  discount  than  they  have  been  will- 
ing to  accept  for  two  months  and  a  half.     The 


THE   WAR   WITH  SPAIN  199 

process  of  bank  expansion  and  contraction  seems 
destined  to  repeat  itself.  The  banks  will  foster 
business  until  it  becomes  active  and  apparently 
prosperous,  and  when  some  other  cause  for  alarm 
occurs,  say  the  fall  elections  or  an  active  business, 
then  they  will  again  compel  liquidations  and  again 
throw  the  whole  burden  of  the  losses  thereof  on 
the  mercantile  community. 

If  we  look  back  on  the  history  of  monetary 
affairs,  we  see  that  this  alternation  of  bank  expan- 
sion and  bank  contraction  has  been  going  on  in 
this  country  and  in  England  with  little  intermis- 
sion for  generation  after  generation,  and  it  has 
always  been  at  the  expense  of  the  business  com- 
munity and  for  the  protection  of  the  banks. 

But  in  France  and  Germany  bank  rates  of  in- 
terest seldom  change,  and  they  do  not  have  mone- 
tary panics.  The  explanation  is  that  in  those 
countries  they  have  systems  of  graded  banks,  and 
when  a  "  run  "  occurs,  the  commercial  or  popular 
banks  do  not  turn  on  their  borrowers  to  force 
liquidation  and  disaster  on  them,  but  they  turn  for 
assistance  to  a  higher  grade  of  banks,  to  whom  is 
given  the  exclusive  power  to  issue  a  credit  cur- 
rency. The  contention  herein  maintained  is  that 
we  can  protect  commercial  credit  in  our  country 
with  a  certainty  equal  to  that  attained  in  France 
and  Germany,  by  incorporating  our  clearing  houses 
under  a  federal  law,  as  j^roposed  in  Bill  H.  R, 
No.  9279,  Fifty-fifth  (Congress,  Second  Session, 
and  by  giving  to  at  least  one  in  each  State  the 


200  FEDERAL   CLEARING  HOUSES 

power  to  issue  credit  currency  on  pledge  of  bank 
assets. 

This  measure  would  protect  commercial  credit 
and  the  business  community  from  the  largest  part, 
if  not  all,  of  the  losses  occasioned  by  forced  liqui- 
dations under  our  present  "  evil  and  misguided 
system."  It  would  substitute  the  clearing  house 
in  the  place  of  the  business  comnnmity,  as  the 
resource  of  the  banks  for  their  protection.  It 
would  make  our  banking  system  strong  enough  to 
withstand  even  the  assault  of  war  without  serious 
disturbance. 

Our  banking  system  is  like  a  bridge  which  is 
not  sufficiently  strong  to  carry  any  but  a  light 
traffic.  If  a  heavy  strain  is  put  upon  it,  it  will 
break  down.  The  resource  which  is  employed 
to  protect  it  is  to  dump  the  surplus  passengers 
and  freight  into  the  river.  Would  it  not  be 
better  to  strengthen  the  piers  and  superstructure 
so  that  there  will  be  a  margin  of  safety  above 
any  strain  to  which  the  bridge  can  be  subjected 
from  either  traffic  or  elements  ?  It  is  not  a  great 
cause  for  congratulation,  after  a  narrow  escape 
from  a  disaster  such  as  was  feared  from  the  Span- 
ish war,  to  learn  that  this  time  the  old  bridge  stood, 
and  only  a  few  of  the  passengers  and  a  small  part 
of  the  freight  had  to  be  thrown  into  the  river. 

Causes  for  every  panic  may  easily  be  found, 
and  it  seems  to  many  that  if  this  or  that  thing 
had  been  done  by  banks  or  leading  financial  men, 
any  given  panic  might  have  been  avoided.^    If  the 


THE   WAR    WITH  SPAIN  201 

silver  men  had  not  made  their  campaign  we  should 
not  have  had  the  silver  panic.  If  the  Venezuela 
message  had  not  been  written  we  should  not  have 
had  the  Venezuela  panic. 

But  we  must  expect  every  now  and  then  star- 
tling events  of  sufficient  power  to  shake  confidence. 
We  must  expect  mi  wise  action  by  unwise  men  ; 
we  must  expect  unlooked-for  disasters,  wars  and 
trouble  of  all  sorts.  We  must  expect  errors  of 
judgment  among  business  men,  infatuations  and 
bubbles. 

These  are  all  permanent  factors  in  the  problem. 
The  question  is,  How  does  our  banking  system  act 
under  the  stress  produced  by  such  circumstances  ? 
It  is  not  whether  the  disturbance  was  of  larger  or 
smaller  dimensions,  or  whether  if  this  or  that 
event  had  or  had  not  happened,  the  disturbance 
might  have  been  avoided  or  lessened,  but  it  is, 
What  is  the  action  of  our  banking  system  when  a 
disturbance  takes  place  of  sufficient  magnitude  to 
impair  confidence  ?  Is  the  banking  system  at  such 
a  time  a  support  to  commercial  credit  or  does  it 
destroy  it  ?  Does  it  defend  or  attack  the  business 
community  ?  Is  there  cooperation  or  antagonism 
between  the  banks  and  the  people  ?  Do  the  banks 
consider  the  people  fair  game  at  such  times  ?  Are 
they  at  peace  or  at  variance  with  one  another? 
The  words  of  Nathan  Appleton  of  Boston  answer 
the  question  when  he  said,  "  But  these  alternatives 
of  bank  expansions  and  nominal  prosperity,  fol- 
lowed by  bank   contraction,  disappointments  and 


202  FEDERAL  CLEARING  HOUSES 

perhaps  failures,  are  very  much  to  be  deprecated. 
The  banks,  to  be  sure,  have  no  difficulty  in  these 
cases  if  well  managed ;  the  whole  pressure  is 
thrown  on  the  mercantile  community."  Samuel 
Hooper,  a  merchant  of  Boston,  formerly  a  member 
of  the  House  of  Representatives,  expressed  the 
same  opinion  as  follows :  "  No  blame  should  be 
imputed  to  the  banks  or  their  directors  for  the 
inconvenience  and  distress  caused.  They  have 
only  consulted  the  interests  of  the  banks.  In 
doing  so  they  were  true  to  the  system.  The  in- 
terest of  the  bank  is  at  variance  with  the  public 
interest.  The  customers  of  the  bank  sustain  the 
loss  while  the  banks  have  had  the  profit." 

An  examination  of  the  developments  during  the 
fmancial  disturbance  caused  by  the  present  war 
with  Spain  shows  that  it  is  like  all  previous  pan- 
ics. The  whole  burden  was  thrown  on  the  mer- 
cantile conununity,  and  the  interests  of  the  banks 
were  at  variance  with  the  interests  of  the  people. 
Should  not  this  wrong  be  righted  ?  It  can  easily 
be  done  by  incorporating  clearing  houses  under 
a  federal  law,  giving  them  special  functions  and 
rights  not  enjoyed  by  commercial  banks,  and  con- 
ferring upon  at  least  one  in  each  State  the  power 
to  issue  currency  to  banks  on  pledge  of  bank 
assets  as  collateral.  This  wiU  form  our  banks 
into  a  system,  which  will  protect  the  credit  of  both 
banks  and  the  commercial  community,  prevent  or 
largely  mitigate  panics,  and  establish  cooperation 
between  the  banks  and  the  people. 


VII 


VARIANCE     OF     INTEREST     BETWEEN    THE     BANKS 
AND   THE   PUBLIC 

In  the  issue  of  the  "  New  York  Evening  Post  " 
of  the  11th  inst.,  May,  1898,  in  commenting  on 
the  book  entitled  "  A  Graded  Banking  System  " 
the  writer  says  that  the  author  apparently  sup- 
poses "  that  bankers  are  indifferent  to  the  solvency 
of  the  people  whose  notes  they  discount."  A  care- 
ful reading  of  the  paragraph  preceding  the  one 
quoted  does  not  sustain  this  inference.  Not  only 
to  set  the  matter  right  with  the  readers  of  that 
valuable  paper,  but  to  call  attention  to  what  seems 
to  be  almost  a  forgotten  aspect  of  our  banking 
system,  composed  as  it  is  of  individual  banks  of 
equal  grade,  a  few  words  must  be  said  in  explana- 
tion of  the  statements  referred  to. 

Let  us  begin  with  the  provision  of  the  National 
Bank  Act,  chapter  5,  section  95,  that  whenever  the 
reserves  of  a  bank  fall  below  the  legal  requirement, 
it  shall  not  make  any  new  loans  or  discounts  until 
its  reserves  are  restored,  and  if  after  thirty  days  it 
shall  fail  to  make  them  good,  a  receiver  may  be 
appointed  to  wdnd  up  its  business. 

This  is  a  simple  regulation.     It  is  addressed  to 


204  FEDERAL  CLEARING  HOUSES 

each  individual  bank,  and  instructs  each  separately 
to  make  good  its  reserves,  if  by  chance  they  fall 
below  what  the  law  regards  as  a  prudent  percent- 
age, by  calling  in  loans  and  refusing  to  renew  dis- 
counts. The  theory  is  that  the  outside  public  is  a 
reservoir,  from  which  each  bank  may  with  pro- 
priety draw  cash  to  repair  its  reserves.  The  law 
thus  constitutes  an  individual  bank  as  the  unit  for 
the  system,  and  having  made  the  regulation  for  the 
government  of  the  unit  in  protecting  its  reserve, 
it  forms  the  system  by  multiplying  the  miit  three 
or  four  thousand  times. 

The  system  thus  formed  in  its  nature  is  a  com- 
petitive system.  It  has  within  it  all  the  material 
for  a  bank  crisis  ;  for  whenever  a  general  effort  to 
restore  reserves  is  made  at  the  same  time  by  all 
the  banks,  banking  facilities  as  a  necessary  con- 
sequence are  withdrawn  all  over  the  country,  and 
great  distress  is  occasioned  to  the  business  com- 
munity. If  complaint  is  made  of  the  action  of  the 
banks,  their  reply  is  that  they  are  only  complying 
with  the  law,  and  that  while  they  regret  exceed- 
ingly to  cause  any  disturbance,  there  is  no  other 
way  provided  in  the  law  by  which  they  can  pro- 
tect themselves.  This  is  a  perfect  answer,  and 
it  quiets  the  consciences  of  bank  officers  even 
when  they  see  and  know  that  their  acts  cause  wide- 
spread distress.  They  do  not  feel  indifference,  but 
a  kind  of  complacence  or  serenity  that  comes  from 
the  performance  of  strictly  legal  action,  which, 
while  it  benefits  the  bank,  at  the  same  time  hurts 
the  community. 


VARIANCE  OF  INTEREST  205 

This  one-sided  operation  has  been  commented* 
on  by  many  authorities  on  banking.  Samuel 
Hooper^  a  merchant  of  Boston,  formerly  a  member 
of  the  House  of  Representatives,  in  his  book  on 
"  Currency  and  Money,"  says  that  this  is  a  process 
"  which  invigorates  the  currency  at  the  expense  of 
the  industry  and  enterprise  of  the  coimtry."  He 
quotes  Hon.  Nathan  Appleton  of  Boston  as  saying : 
"  But  these  alternatives  of  bank  expansions  and 
nominal  prosperity,  followed  by  bank  contraction, 
disappointments,  and  perhaps  failures,  are  very 
much  to  be  deprecated.  The  banks,  to  be  sure, 
have  no  difficulty  in  these  cases,  if  well  managed ; 
the  whole  pressure  is  thrown  on  the  mercantile 
community."  Mr.  Hooper  continues  :  "  No  blame 
should  be  imputed  to  the  banks  or  their  directors 
for  the  inconvenience  and  distress  caused.  They 
have  only  consulted  the  interests  of  the  banks.  In 
doin^  so  they  were  true  to  the  system.  The  in- 
terest of  the  bank  is  at  variance  with  the  public 
interest.  The  customers  of  the  bank  sustain  the 
loss,  while  the  banks  have  had  the  profit." 

The  truth  of  these  words  is  shown  in  every  panic. 
After  a  while,  perhaps,  business  men  will  begin 
to  get  at  the  true  definition  of  the  word  "  panic," 
which  is  a  sacrifice  of  commercial  interests  to  sup- 
port the  banking  system.  Is  there  not  a  cheaper 
way  to  secure  this  most  desirable  and  essential 
sujjport  ? 

The  contention  in  the  book  under  discussion  is 
weU  epitomized  as  follows,  —  that  there  should  be 


206  FEDERAL   CLEARING  HOUSES 

a  clearing  house  incorporated  in  every  State,  by  a 
national  law,  which  should  issue  currency  to  banks 
on  pledge  of  their  assets  as  collateral.  The  object 
of  this  is  to  make  the  banks  sustain  their  customers 
as  weU  as  derive  a  profit  from  them.  They  would 
do  this  by  turning  to  the  clearing  house  to  find  a 
remedy  for  a  bank  crisis  instead  of  throwing  the 
whole  pressure  on  the  mercantile  community,  —  to 
use  the  words  of  Nathan  Appleton.  The  result  is 
that  cooperation  is  thus  established,  which  prevents 
the  interests  of  the  banks  from  being  at  variance 
with  the  interests  of  the  people. 


VIII 

RELIEF    FOR   THE    BANKS 

After  a  pestilence  in  a  city  the  authorities 
can  generally  be  induced  to  study  modern  methods 
for  the  disposal  of  sewage.  Loss  of  property  and 
of  life  seems  necessary  to  awaken  a  community 
to  consider  the  recommendations  of  experts  or  to 
move  a  corporation  to  change  from  old  methods  to 
new.  All  remember  the  cost  of  life  and  property 
needed  to  secure  the  abandonment  of  side  wheels 
on  ocean  steamers,  and  many  expensive  reforms 
in  railroading  are  due  to  equally  dreadful  disasters. 

The  gi'eat  loss  of  property  resulting  from  the 
defects  of  our  banking  system  should  be  the  incen- 
tive to  similar  reforms,  and  it  is  opportune  at  the 
present  time  [August,  1896]  to  point  out  those 
defects  while  they  are  causing  losses  and  deranging 
the  business  of  the  country.  In  a  time  of  disturb- 
ance men  do  not  turn  lightly  away  fi^om  the  con- 
sideration of  measures  of  relief. 

The  defect  of  our  banking  system  is  that  a 
forced  liquidation  is  the  only  way  provided  by  law 
for  the  restoration  of  depleted  bank  reserves. 

The  national  banking  law  requires  a  specified 
percentage  of  reserve   to  be  maintained,  but   by 


208  FEDERAL   CLEARING  HOUSES 

redeposit  the  actual  amount  of  cash  reserves  is 
much  reduced  from  that  percentage.  The  banks, 
therefore,  are  allowed  by  law  to  do  business  on 
their  credit,  and  to  owe  four  or  five  times  as  much 
as  the  amount  of  cash  on  hand.  But  when  they 
are  called  on  for  their  reserves,  or  any  part  of  them, 
the  law  makes  no  provision  by  which  they  may 
restore  or  protect  them  except  by  forcing  liquida- 
tions on  the  business  community.  Forced  liquida- 
tion means  disaster.  It  catches  the  community  on 
a  sudden  and  compels  them  to  sell  out  their  pro- 
perty at  a  sacrifice  to  raise  money  to  restore  the 
reserves  of  the  banks.  This  causes  great  declines 
of  all  values  and  many  troubles  both  known  and 
unknown.  It  stops  business  and  wages,  and  all 
for  the  sole  purpose  of  restoring  the  reserves  of 
the  banks. 

It  stands  to  reason  that  a  system  of  banking  is 
defective  which  works  in  this  way.  It  is  the  credit 
system  for  the  banks  and  a  cash  system  for  their 
borrowers.  And  our  banks  are  running  on  such  a 
small  margin  of  reserves  that  the  business  com- 
munity is  at  all  times  in  danger  of  being  called 
upon  unawares  to  liquidate,  to  help  the  banks  out. 
After  losses  have  been  incurred  and  depreciations 
have  taken  place  to  the  extent  of  hundreds  of 
millions,  then  the  banks  can  resort  to  the  extra- 
legal and  extra-hazardous  method  of  protecting 
themselves  and  helping  out  the  survivors  by  trench- 
ing on  their  reserves,  and  issuing  to  themselves 
clearing-house  certificates  in  place  of  reserves  paid 


RELIEF  FOR   THE  BANKS  209 

out  to  meet  cash  demands.  Before  using  this  last 
resort  the  public  has  been  pretty  well  squeezed. 

In  all  these  matters  the  banks  are  doing  the  very 
best  they  can  for  their  customers  and  the  business 
community,  and  are  not  open  to  any  criticism  or 
censure,  for  the  blame  is  wholly  and  entirely  on 
the  existing  system,  and  is  due  to  its  plain  and 
easily  remedied  defects. 

The  remedy  is  that  our  banks  should  not  only  be 
conducted  on  the  credit  system  as  now,  with  author- 
ity to  lend  75  per  cent,  of  their  depositors'  money 
and  retain  25  j^er  cent,  on  hand  as  a  cash  reserve, 
but  also,  in  case  of  need,  shoidd  have  some  source 
from  which  they  can  obtain  circulating  notes,  on 
pledge  of  their  commercial  assets,  for  a  further 
percentage  of  their  depositors'  money,  which,  with 
the  cash  reserve  of  25  per  cent.,  would  give  them 
sufficient  funds  to  liquidate  as  much  of  their  deposits 
as  might  be  demanded  without  forcing  liquidations 
at  frequently  recurring  intervals  on  the  borrowers 
of  the  75  per  cent. 

It  is  true  that  in  ordinary  times  it  is  safe  for 
banks  to  lend  75  per  cent,  of  their  depositors' 
money  and  to  hold  but  25  per  cent,  as  a  reserve  ; 
but  to  meet  extraordinary  events,  like  the  Baring 
failure,  or  the  panic  of  1893,  or  the  Venezuela 
message,  or  the  silver  scare,  power  should  be 
lodged  somewhere  by  which  the  banks  could  obtain 
sound  credit  in  the  form  of  circulating  notes  to 
liquidate  the  75  per  cent.,  or  a  sufficient  percent- 
age thereof  to  carry  them  over  the  extraordinary 


210  FEDERAL   CLEARING  HOUSES 

crises  to  quieter  times  without  calling  upon  the 
borrowers  of  the  75  per  cent,  to  make  forced 
liquidations  and  great  losses  to  accomplish  the 
same  object.  It  is  evident  that  if  the  banks  could 
obtain  sound  credit  in  the  form  of  circulating- 
notes,  the  liquidation  would  be  accomphshed  with- 
out loss  to  themselves  or  the  business  community. 

A  knowledge  that  the  banks  had  this  power  to 
protect  their  reserves  in  this  way  would  allay  if 
not  prevent  panics. 

This  is  the  system  of  the  Bank  of  France  and 
of  the  Imperial  Bank  of  Germany.  During  the 
twenty-five  years  in  which  this  system  has  been  in 
operation  in  Germany  it  has  been  tested  many 
times  by  serious  financial  disturbances,  and  has 
carried  the  business  community  of  that  nation 
safely  through  them  all.  A  French  bank  will  ad- 
vertise its  condition,  showing  10  per  cent,  of  its 
liabilities  in  cash,  10  per  cent,  in  call  loans,  and  50 
per  cent,  in  biUs  receivable  "  immediately  discount- 
able at  the  Bank  of  France."  Such  a  showing  is 
impregnable. 

The  same  end  can  be  attained  in  our  country 
by  incorporating  our  clearing  houses  under  United 
States  laws,  with  power  under  suitable  restrictions 
to  issue  a  clearing-house  currency  to  their  mem- 
bers. This  idea  has  been  elaborated  in  the  bill 
H.  R.  3338,  which  was  introduced  in  the  House  of 
Representatives,  January  6th,  1896,  by  the  Hon- 
orable Benjamin  S.  Fairchild,  and  in  explanation 
of  which  a  statement  was  before  a  sub-committee 


RELIEF  FOR   THE  BANKS  211 

of  the  House  Committee  on  Banking  and  Currency 
in  February,  both  of  which  documents  were  pub- 
lished in  "  The  Banking  Law  Journal "  of  March, 
1896. 

Any  circulating  notes  issued  to  banks  must  be 
of  a  credit  so  undoubted  as  to  be  accepted  by  all 
banks  in  any  panic.  This  credit  can  be  reached 
by  the  supervision  of  the  associated  banks,  and 
this  supervision  by  the  incorporation  of  clearing 
houses  under  United  States  laws. 

Now,  since  it  has  occurred  that  the  party  friendly 
to  silver  and  hostile  to  national  banks  has  been  de- 
feated in  the  general  election  of  1896,  the  comple- 
tion of  the  national  banking  system  in  harmony 
with  American  institutions  becomes  a  practical 
and  pressing  question.  A  good  tariff  will  protect 
the  finances  of  the  general  government,  and  easily 
maintain  all  its  obligations  on  a  par  with  gold. 
A  sound  banking  system  will  give  stability  to  our 
commerce  and  protection  to  the  credit  of  the  busi- 
ness community.  These  two  measures  should  mark 
the  advent  of  the  present  administration  [1897- 
1901]  in  which  all  branches  of  the  government  are 
controlled  by  one  political  party. 


IX 

WHAT   IS   AN   ELASTIC    CURRENCY? 

The  editorial  in  the  "  New  York  Tribune " 
of  the  6th  January,  1899,  entitled  "  An  Elastic 
Currency,"  states  well  the  argument  in  favor  of 
our  present  system,  and  invites  a  reply  by  asking, 
"  What  do  people  mean  by  an  elastic  currency  ?  " 
The  advocates  of  such  a  currency  should  be  pre- 
pared to  answer  a  question  put  so  fairly  and 
clearly. 

The  subject  can  best  be  explained  by  an  ex- 
ample ;  and  as  the  facts  of  the  financial  situation 
in  1893  are  now  well  known  through  the  reports 
of  the  comptroller  of  the  currency  and  from  other 
sources,  we  may  accept  them  as  substantially  cor- 
rect, and  use  them  for  illustration. 

The  financial  bridge  broke  down  in  1893,  as  it 
has  broken  down  before  and  since.  The  explana- 
tion of  the  breakdown  is  that  the  bridge  was  not 
able  to  bear  the  strain.  There  are  two  ways  of 
obviating  these  accidents.  One  is  the  old-fash- 
ioned way,  not  to  allow  the  teams  to  go  faster  than 
a  walk,  and  the  other  is  to  make  the  bridge  so 
strong  that  a  loaded  express  train  can  go  at  full 
speed    over    it    without    causing   any    deflection. 


WHAT  IS  AN  ELASTIC  CURRENCY?     213 

Modern  business  requires  solid  construction,  and 
that  is  the  end  aimed  at  in  this  discussion. 

The  facts  of  the  breakdown  in  1893  are  as  fol- 
lows :  The  deposits  of  all  national  banks  in  the 
country  on  December  9,  1892,  and  October  3, 
1893,  were  as  follows  :  — 

December  9,  1892 $1,764,456,177 

October  3,  1893       1,451,124,331 

The   shrinkage   between  these   two   dates   was 

therefore  $313,331,846 

Other  commercial  banks,  state  and  private, 
probably  suffered  a  similar  shiunkage,  and  as  their 
deposits  are  about  one  half  those  of  national 
banks,  the  total  shrinkage  in  banking  deposits 
throughout  the  country  during  the  period  named 
\^as  about  1400,000,000.  This  represents  the 
money  pressure  on  the  banks  caused  by  with- 
drawals, hoarding,  etc.  The  only  resource  the 
banks  have  for  meeting  demands  upon  tliem  with- 
out diminishing  their  reserves  below  legal  require- 
ments, or  calling  loans  and  refusing  discounts, 
and  thus  causing  forced  liquidations,  is  by  ex- 
panding their  national  bank  currency.  Let  us 
see  how  much  relief  was  obtained  by  this  means. 
During  the  period  which  we  are  examining  the 
national  bank  notes  were  increased  as  follows :  — 

Amount  outstanding-  October  1,  1893      .     .     .     $208,592,172 
Amount  outstanding  December  1,  1892     .     .     .  173,510,828 


The  increase  of  the  national  bank  notes 
under  a  $400,000,000  money  pressure  there- 
fore was $35,081,344 


214         FEDERAL   CLEARING  HOUSES 

or  slightly  less  than  10  per  cent,  of  the  amount 
needed  to  prevent  the  panic. 

Consequently  the  banks  were  obliged  to  issue 
clearing-house  certificates  and  have  recourse  on 
their  assets  to  raise  the  balance  of  the  money. 

The  liquidation  which  was  thus  forced  on 
the  business  community  by  the  national  banks  is 
shown  by  the  following  figures.  Their  loans  and 
discounts  were,  on  the  following  dates  :  — 

December  9,  1892 $2,166,615,725 

October  3,  1893 1,843,634,167 

The  amount  of  liquidation  which  was  thus 
forced  on  the  business  community  during  the 
time  named  by  the  national  banks  was  $322,981,- 
558. 

A  corresponding  liquidation  was  made  by  other 
commercial  banks,  bringing  the  total  stoppage  of 
business  up  to  about  1400,000,000.  The  disas- 
trous consequences  of  this  liquidation  have  been 
felt  for  years.  The  total  failures  for  the  years 
1892  and  1893,  as  given  in  "  Dun's  Eeview,"  were 
as  follows :  — 

No.  of  Amount  of 

Year.                                                          failures.  liabilities. 

1892 10,344  $114,044,167 

1893 15,242  346,779,889 

Increase  in  1893 4,898     $232,735,722 

These  failures  and  liabilities  represent  the 
financial  troubles  and  losses  that  came  to  the  sur- 
face. The  losses  that  were  borne  without  pub- 
licity would  increase  the  amount  largely. 


WHAT  IS  AN  ELASTIC  CURRENCY?     215 

What  is  the  inference  ?  It  is  that  our  present 
system  affords  our  business  community  less  than 
one  tenth  of  the  protection  from  panic  which  it 
needs.  In  other  words,  under  a  tremendous 
money  pressure  the  currency  has  one  tenth  of  the 
elasticity  it  should  have.  There  was  an  unused 
currency  privilege  on  government  bonds  at  the 
same  time  of  $427,000,000,  but  the  banks  did 
not  own  and  could  not  acquire  the  bonds  neces- 
sary to  avail  themselves  of  it.  There  was  a  simi- 
lar state  of  affairs  in  1873  and  in  all  the  minor 
panics.  Does  not  tliis  prove  that  our  present  sys- 
tem is  inelastic  ? 

If  a  man-of-war  were  required  to  pass  a  speed  test 
of  twenty  miles  an  hour,  and  under  forced  di-aught 
could  go  only  two  miles,  would  it  not  be  condemned 
as  having  no  speed  ?  If  a  projectile  were  required 
to  pierce  ten  inches  of  armor-plate  and  could  pierce 
it  only  one  inch  and  then  shatter,  would  not  that 
be  called  a  lack  of  piercing  power?  If  all  the 
departments  of  the  army  and  navy  were  at  only 
one  tenth  of  required  efficiency,  in  what  shape 
would  the  country  be  to  resist  the  attack  of  a 
foreign  power  ?  That  is  the  position  of  our  bank- 
ing system  to-day.  It  has  less  than  one  tenth  of 
the  elasticity  necessary  to  ward  off  a  panic. 

The  principle  of  elasticity  may  be  formulated 
as  follows  :  If  the  mode  of  supplying  bank  cur- 
rency is  by  notes  issued  on  special  classes  of 
assets,  then  the  elasticity  of  the  currency  will  be 
just  in  the  proportion  which  those  special  assets 


216  FEDERAL   CLEARING  HOUSES 

bear  to  the  total  liabilities  of  the  banks.  Or  it 
mio'ht  be  limited  somewhat  as  follows  :  That  the 
elasticity  of  a  currency  so  issued  would  be  in  the 
proportion  which  those  special  assets  bear  to  the 
amount  of  money  needed  to  insure  solvency  under 
any  and  all  circumstances. 

The  article  closes  as  follows :  "  If  this  [the 
present  currency]  is  not  the  most  elastic  currency 
conceivable,  pray,  what  banker  can  suggest  any 
form  of  circulation  which  will  be  as  elastic,  as  re- 
sponsive to  the  needs  of  business  and  in  the  light 
of  experience  equally  safe?" 

What  has  just  been  said  is  intended  to  prove 
that  our  present  currency  has  only  one  tenth  of 
required  elasticity,  and  an  answer  is  needed  to  the 
last  part  of  the  question  only. 

The  banks  of  the  city  of  New  York  associated 
in  the  New  York  Clearing  House  for  the  last 
forty  years,  and  other  banks  in  other  clearing 
houses,  for  a  lesser  time,  have  suggested  in  their 
clearing-house  certificates  a  form  of  currency  to 
give  relief  to  the  business  community  in  time  of 
panic.  The  basis  of  this  currency  is  any  of  the 
acceptable  assets  of  the  banks,  and  consequently  it 
has  all  the  elasticity  to  be  obtained  from  absence 
of  limitation  to  a  special  class  of  assets.  No 
money  has  ever  been  lost  on  clearing-house  certifi- 
cates, and  "  in  the  light  of  experience  "  they  are 
equally  safe  with  national  bank  notes.  They  are 
also  responsive  to  the  demands  of  business. 

Clearing-house  methods  need  only  to  be  legal- 


WHAT  IS  AN  ELASTIC  CURRENCY?     217 

izecl  by  the  incorporation  of  clearing  houses  under 
a  federal  law,  so  that  they  can  do  legally  that 
which  for  forty  years  they  have  successfully  done 
extra-legaUy,  in  order  to  carry  this  suggestion  into 
practical  effect.  One  clearing  house  of  issue  might 
safely  be  established  in  each  State,  so  that  the 
business  of  all  the  country  could  receive  equal 
protection.  The  issues  should  be  in  the  form  of 
currency  to  be  circulated  as  money,  and  then  our 
banks  would  be  in  position  to  meet  demands  for 
currency  without  forcing  liquidations  on  the  com- 
mercial community. 

Not  only  has  this  suggestion  the  recommenda- 
tion of  a  favorable  business  experience  for  forty 
years,  but  it  is  approved  by  some  of  the  ablest  of 
the  scientific  monetary  experts  in  this  country. 

The  need  of  elasticity  and  the  way  to  get  it 
may  be  taken  as  the  theme  of  "  The  Theory  of 
Credit,"  a  work  by  McLeod,  the  foremost  English 
authority  on  banking  and  currency.  He  states 
his  fundamental  princijjle  thus  :  "  In  the  modern 
system  of  credit  it  is  indispensably  necessary  that 
there  should  be  some  source  to  create  and  issue 
solid  credit  to  sustain  solvent  houses  in  a  mone- 
tary panic." 

It  is  the  sad  experience  of  our  business  men 
that  we  have  no  such  source  in  this  country  in 
any  way  adequate  to  our  needs ;  but  the  opinion  is 
gaining  ground  that  the  incorporation  of  our 
clearing  houses  under  a  federal  law,  with  power  to 
issue  an  emergency  currency,  would  give  it  to  us. 


CLEARING-HOUSE       CURRENCY      EXPLAINED      AND 
DEFENDED 

In  the  article  entitled  "  Elasticity  in  the  Cur- 
rency "  in  "  Sound  Money  "  for  February,  1899, 
the  writer  says  :  "  There  is  nothing  to  prevent  the 
banks  in  any  State  which  have  formed  a  clearing 
house  from  doing  just  what  the  New  York  banks 
did  in  1893,  and  if  they  did  not  do  so  it  was  pro- 
bably because  they  hesitated  to  trust  each  other. 
If  Mr.  Gihnan's  plan  of  legalized  clearing  houses 
had  been  in  operation  in  1893  in  such  States 
as  Kansas,  Nebraska,  and  Alabama,  there  would 
have  been  a  flood  of  certificates  issued  ao'ainst 
titles  to  land  enormously  overvalued." 

An  explanation  is  needed  to  endeavor  to  remove 
any  misapprehensions  which  the  brevity  of  the  let- 
ter to  the  "  New  York  Tribune,"  on  which  the 
above  quoted  comments  are  based,  may  have  occa- 
sioned. 

CLEARING-HOUSE     CERTIFICATES     AND      CLEARING- 
HOUSE   CURRENCY    COMPARED 

First,  the  distinction  must  be  perceived  between 
clearing-house  certificates  and  clearing-house  cur- 


CLEARING-HOUSE  CURRENCY         219 

rency.  The  certificates  are  a  currency  only  be- 
tween the  bank  members  of  the  clearing  house 
which  issues  them,  while  the  clearing-house  cur- 
rency would  be  circulated  as  money  between 
banks  and  their  creditors  and  also  tlu'oughout  the 
community.  Clearing-house  certificates  take  the 
place  in  the  vaults  of  the  banks  .of  their  lawful 
money  reserves  which  they  have  paid  out,  while 
clearing-house  currency  woidd  be  paid  out  by  the 
banks  to  meet  demands  on  them,  and  thus  they 
would  be  enabled  to  hold  their  lawful  money  re- 
serves undiminished.  A  bank  creditor  at  the  clear- 
ing house  must  take  its  proportion  of  the  certifi- 
cates instead  of  cash,  and  therefore  every  issue  of 
certificates  diminishes  the  amount  of  cash  held  by 
the  banks  in  the  clearing  house,  and  weakens  their 
position  to  that  extent.  Even  in  the  largest  clear- 
ing houses,  the  amount  of  certificates  which  can 
be  issued  is  limited  by  the  amount  of  cash  which 
can  be  spared,  and  that  is  small  when  compared 
with  the  demand  which  arises  in  a  jianic. 

SAMUEL     J.    TILDEN     ON     THE     INSUFFICIENCY     OF 
CLEARING-HOUSE    CERTIFICATES 

Samuel  J.  Tilden  alluded  to  the  insufficiency  of 
clearing-house  certificates  to  control  the  panic  of 
1873,  in  his  first  annual  message  to  the  Legislature 
of  New  York  in  1875.  He  said:  ''It  is  idle  to 
pronounce  the  machinery  of  credit  a  maniac  and 
then  to  put  only  its  little  finger  in  a  strait- jacket." 
That  is,  clearing-house   certificates   are  no  more 


220  FEDERAL   CLEARING  HOUSES 

able  to  control  a  panic  than  holding  his  little  fin- 
ger would  enable  one  to  subdue  a  maniac. 

This  was  said  by  Mr.  Tilden  when  the  panic  of 
1873  was  fresh  in  the  minds  of  all.  It  is  a  self- 
evident  proposition  that  the  power  to  control  a 
panic  must  be  greater  than  the  power  possessed 
by  the  panic.  But  it  is  wiser  to  give  a  prophylac- 
tic to  the  financial  patient,  well  compared  by  Mr. 
Tilden  to  a  maniac,  and  thus  ward  off  the  parox- 
ysm entirely,  than  to  wait  until  the  fit  is  on  and 
then  endeavor  to  control  it  by  heroic  measures. 
Clearing-house  certificates  are  by  their  nature 
remedial  and  not  preventive.  They  are  a  last 
resource  in  a  panic.  They  are  like  a  strait-jacket 
after  a  patient  has  become  excited.  Clearing- 
house currency  by  its  nature  is  preventive. 

CLEARING-HOUSE     CERTIFICATES     DANGEROUS     TO 
INTERIOR   BANKS 

Then,  again,  clearing-house  certificates  cannot 
be  issued  with  safety  by  interior  clearing  houses, 
for  they  would  drain  the  banks  of  their  lawful 
money  reserves,  which  would  not  return  to  them, 
and  the  banks  would  be  left  in  a  weak  and  viJner- 
able  position.  Clearing-house  currency,  on  the 
other  hand,  could  be  issued  by  interior  clearing 
houses  with  entire  freedom  and  safety,  and  the 
further  it  would  go  from  home  and  the  longer  it 
stayed  out,  the  greater  the  profit  to  the  issuing 
bank.  Such  a  currency  would  prevent  panics  by 
providing  an  ample  supply  of  money  as  soon  as 


CLEARING-HOUSE  CURRENCY         221 

the  need  arose,  and  thus  would  produce  stability 
at  all  times.  It  would  be  accepted  by  the  pubhc 
as  the  very  embodiment  of  "  Soimd  Money." 

CLEARING-HOUSE       CURRENCY       PREVENTIVE      OF 
PANICS 

Clearing-house  currency  would  be  authorized  by 
law  to  circulate  as  money  in  the  community.  It 
would  have  all  the  safeguards  which  have  proved 
so  effective  in  connection  with  certificates,  and  be 
issued  to  banks  on  collateral  at  75  per  cent,  of  its 
valuation,  and  be  received  by  all  banks  for  aU 
dues  to  them.  It  would  thus  be  maintained  at  par 
from  one  end  of  the  country  to  the  other.  The 
"  maniac  "  could  not  have  a  paroxysm  because  the 
sedative  would  be  administered  before  the  appear- 
ance of  the  convidsion.  The  currency  would  be 
paid  out  and  the  lawful  money  reserves  retained. 
Clearing-house  currency  would  therefore  be  a  pro- 
tection to  the  banks  and  a  source  of  strength, 
while  we  have  seen  that  the  certificates  weaken  the 
banks  with  every  issue.  So  it  appears  that  ade- 
quate elasticity  would  be  provided  by  such  cur- 
rency, while  the  amount  of  elasticity  afforded  by 
certificates  is  entirely  inadequate. 

CLEARING-HOUSE     CURRENCY     SAFE     IN     WESTERN 
STATES 

The  second  sentence  quoted  above  from  the  arti- 
cle under  discussion  expresses  a  fear  that  clearing- 
house currency  issued  in  "  such  States  as  Kansas, 


222  FEDERAL  CLEARING  HOUSES 

Nebraska,  and  Alabama  "  would  not  be  well  secured, 
and  would  be  issued  in  excessive  amounts. 

These  fears  are  quieted  by  an  examination  of 
the  proposed  bill  incorporating  clearing  houses. 
The  words  describing  the  assets  which  may  be 
pledged  as  collateral  security  to  the  issues  of  clear- 
ing-house currency  are  the  same  as  those  used  in 
the  National  Bank  Act,  which  limit  the  investments 
of  national  banks.  "  Titles  to  land  enormously 
overvalued"  are  therefore  excluded. 

PKOVISIONS    SIMILAR    TO    THOSE    OF    OLD     STATE 
BANK    SYSTEMS 

The  proposed  bill  also  limits  the  issues  to  the 
par  of  the  capital  of  each  bank.  Therefore  in 
States  with  small  banking  capital  the  issues  would 
be  small. 

The  proposed  bill  also  makes  the  clearing  houses 
of  each  State  hable  for  any  loss  on  the  currency 
issued  to  banks  in  their  State.  This  liability  woidd 
tend  to  restrict  issues  within  conservative  Imiits. 
The  contingency  of  losses  sufficient  to  absorb  the 
entire  banking  capital  of  a  State,  so  that  a  loss 
would  fall  upon  the  clearing  houses  of  other  States, 
is  provided  for  in  the  bill,  but  is  too  remote  to  call 
for  much  consideration. 

Those  who  are  familiar  with  the  banking  me- 
thods which  prevailed  a  generation  ago,  wiU  recog- 
nize that  these  provisions  are  similar  to  those  of 
the  old  state  banking  systems. 


CLEARING-HOUSE  CURRENCY 


223 


CLEARING-HOUSE     CURRENCY     SAFE      IN     KANSAS, 
NEBRASKA,    AND    ALABAMA 

As  the  States  of  Kansas,  Nebraska,  and  Alabama 
have  been  mentioned  in  the  editorial  under  review, 
it  may  be  well  to  examine  the  condition  of  their 
banks  to  see  whether  the  proposed  clearing-house 
currency  would  be  safe  if  issued  by  them. 

The  following  figures  are  taken  from  the  report 
to  the  comptroller  of  the  currency  for  September 
20,  1898,  and  relate  to  national  banks  only. 


STATEMENT  OF  CAPITAL,  DEPOSITS,  LOANS,  AND  RESERVES  OF 
BANKS  IN  THE  STATES  OF  KANSAS,  NEBRASKA,  AND  ALA- 
BAMA, AS  SAME  STOOD   ON  THE  20TH   OF   SEPTEMBER,  1898 


State. 

No.  of 
Banks. 

Capital. 

Deposits. 

Loans. 

Kansas  .     . 
Nebraska   . 
Alabama    . 

102 

102 
26 

$8,417,100 

10,225,000 

3,205,000 

$22,507,499.71 

23,370,946.52 

6,765,332.06 

$21,745,527.64 

25,095,894.00 

6,681,950.33 

230 

$21,847,100 

$52,633,778.29 

$53,523,371.97 

Lawful  Money  Reserve. 

Deposit  Reserve. 

Amount. 

Percent- 
age of 
Deposits. 

Amount. 

Percent- 
age of 
Deposits. 

Kansas     .     . 
Nebraska 
Alabama .     . 

$2,310,265.57 
3,674,328.07 
1,029,954.21 

10.26 
15.72 
15.22 

$5,259,015.54 

8,421,907.68 

765,013.75 

23.36 
36.05 
11.30 

$7,014,547.85 

13.32 

$14,445,936.97 

27.44 

224 


FEDERAL  CLEARING  HOUSES 


Under  the  proposed  system  of  incorporated  clear- 
ing houses,  the  available  cash  means  of  the  banks 
in  the  above  three  States  would  be  as  follows  :  — 


Lawful  money  reserve  , 
Deposit  reserve .  .  .  , 
Clearing-house  currency 


Available  money 


$7,014,547.85 
14,445,936.97 
21,847,100.00 


$43,307,584.82 


Percentage 
of  Deposits. 


13.32 
27.44 
41.50 


82.26 


Under  the  present  system,  the  lawful  money  re- 
serve of  13.32  per  cent  is  entirely  inadequate  to 
ward  off  panics,  and  in  a  panic  the  deposit  reserve 
becomes  immediately  unavailable.  No  help  of  any 
account  can  be  had  from  clearing-house  certificates 
in  those  States. 

Under  the  proposed  bill  the  deposit  reserves  and 
the  clearing-house  currency  to  the  par  of  the  bank- 
ing capital  would  be  a  sure  and  available  resource, 
because  the  one  supports  the  other  and  both  rest 
on  the  responsibility  of  all  banks..  Together  with 
the  lawful  money  reserve,  they  would  provide  the 
banks  with  available  cash  equal  to  over  80  per 
cent,  of  their  deposits,  which  would  place  them  in 
an  absolutely  safe  condition. 

The  question  for  banks  in  other  States  to  seek 
an  answer  to  is  whether  an  issue  of  clearing-house 
currency  to  the  par  of  the  capital  of  any  bank, 
guaranteed  by  the  remaining  banks,  could  be  ab- 
solutely secured  out  of  the  assets  of  the  banks  in 


CLEARING-HOUSE  CURRENCY         225 

those  States  so  that  no  contingent  loss  would  fall 
upon  them. 

STKONG   POSITION    OF   BANKS   UNDER  A   CLEARING- 
HOUSE   SYSTEM 

If  all  the  banks  in  those  three  States  should 
take  out  clearing-house  currency  to  the  par  of 
their  banking  capital,  a  contingency  not  at  all 
likely  to  haj^pen,  the  total  amount  issued  would 
be  121,847,100,  requiring  about  $28,000,000  col- 
lateral. This  collateral  security  would  be  the 
best  the  banks  could  offer,  and  the  currency  issued 
thereon  would  pay  down  the  deposits  40  per  cent, 
and  the  banks  would  still  have  their  lawful  money 
and  deposit  reserves  untouched,  which  would  equal 
70  per  cent,  of  their  unpaid  deposits. 

This  shows  how  the  legal  power  to  issue  a  clear- 
ing-house currency  would  place  the  banks  of  those 
States  in  an  impregnable  position  without  any 
danger  of  loss  to  banks  in  other  States. 

The  mere  knowledge  that  the  banks  had  such 
large  available  cash  means  would  produce  a  state 
of  perfect  confidence  with  entire  stability. 

COMPARISON   WITH    CREDIT   LYONNAIS 

Stabihty  is  produced  in  France  by  the  large 
available  reserve  carried  by  the  Bank  of  France, 
which  the  regents  are  free  to  use  without  restric- 
tion to  support  French  commerce,  and  a  similar 
effect  would  be  produced  in  the  United  States  by 
a  clearing-house  system.  Monetary  panics  are 
unknown  in  France. 


226 


FEDERAL   CLEARING  HOUSES 


A  comparison  of  the  conditions  of  the  banks  in 
Kansas,  Nebraska,  and  Alabama  under  a  clearing- 
house system,  with  that  of  the  Credit  Lyonnais, 
one  of  the  largest  of  French  banks,  under  the  pro- 
tection of  a  governmental  bank,  shows  that  in 
important  particulars  they  would  hold  approxi- 
mately the  same  proportion  of  reserve. 

From  the  statement  of  the  Credit  Lyonnais, 
dated  November  30,  1898,  the  following  figures 
are  obtained ;  — 

Credit  Lyonnais,  with  145  branches:  Capital, 
$40,000,000  ;  deposits,  1248,200,000  ;  loans, 
$240,000,000  ;  cash  (equivalent  to  lawful  money 
reserve),  $25,600,000;  call  loans  (equivalent  to 
deposit  reserves),  $21,200,000. 

Under  the  French  system  the  Bank  of  France 
stands  ready  to  use  its  reserve  of  about  $B00,000,- 
000  to  support  the  commerce  of  France. 

The  available  cash  means  of  the  Credit  Lyon- 
nais is  therefore  as  foUows  :  — 


Percentage 
of  Deposits. 

Cash  (equivalent  to  lawful  money 
reserve)    

Call  loans  (equivalent  to  deposit 
reserves)  .     .     

Bills  receivable,  which  they  adver- 
tise are  "immediately  discount- 
able at  the  Bank  of  France  "  .     . 

$25,000,000.00 
21,200,000.00 

126,800,000.00 

10.29 
8.57 

51.27 

Total  available  money     .     . 

$173,600,000.00 

70.13 

CLEARING-HOUSE  CURRENCY 


227 


It  is  seen  by  this  that  the  percentage  of  avail- 
able money  of  the  banks  in  Kansas,  Nebraska,  and 
Alabama  would  be  greater  under  the  proposed 
clearing-house  system  than  that  of  the  Credit 
Lyonnais  is  under  the  French  system  of  a  cen- 
tral national  bank  with  an  enormous  available 
reserve. 

The  percentages  of  reserves  to  deposits  of  the 
two  are  compared  thus :  — 


Lawful  money  reserve  or 
cash 

Deposit  reserves  or  call  loans 

Clearing'-house  currency  .     . 

Bills  receivable  discounta- 
ble at  the  Bank  of  France 


Percentage  of  deposits     . 


Clearing  House  Sys- 
tem, Kan.,  Neb., 
Ala.  Banks. 


13.32  per  cent. 
27.44       " 
41.50       " 


82.26  per  cent. 


Single  Govern- 
mental Bank  Sys- 
tem, Credit  Lyon- 
nais. 


10.29  per  cent. 

8.57   " 


51.27 


70.13  per  cent. 


COMPAEISON    OF    ANGLO-SAXON    AND    LATIN    SYS- 
TEMS   OF    BANKING 

This  comparison  is  instructive  because  it  shows 
the  difference  between  banking  under  Latin  and 
Anglo-Saxon  systems.  The  distinction  is  funda- 
mental. The  Anglo-Saxon  spirit  of  "  individual 
initiative  "  demands  individual  banks  and  will  not 
permit  a  single  governmental  bank  monopoly.  We 
are  therefore  compelled,  in  order  to  reach  stability, 
to  develop  the  clearing  house  to  take  the  place 
occupied  by  the  central  monopoly  of  the  govern- 


228  FEDERAL   CLEARING  HOUSES 

mental  bank,  which  is  odious  in  our  eyes.  The 
central  governmental  bank  performs  to  a  great 
extent  the  functions  of  a  clearing  house,  and  in 
countries  where  such  a  bank  exists  clearing  houses 
are  not  a  necessity  and  do  not  flourish.  The  clear- 
ing houses  of  France,  Germany,  and  Switzerland 
are  unimportant  institutions,  while  in  Great  Brit- 
ain and  the  United  States  they  are  essential. 
Since  a  central  governmental  bank  with  monopolies 
is  repugnant  to  our  institutions,  we  must  develop 
and  legaHze  our  clearing-house  system  to  take  its 
place.  That  system  is  natural  to  us  because  it  is 
in  harmony  with  our  institutions,  and  is  based  on 
the  principles  of  representative  government. 

PROFESSOR  McLEOD'S  PRINCIPLE  OF  A  SOURCE  OF 
ISSUE 

This  comparison  corroborates  Professor  Mc- 
Leod's  principle  and  shows  that,  whether  under 
a  system  of  individual  banks  or  of  a  banking 
monopoly,  "in  our  modern  system  of  credit  it  is 
indispensably  necessary  that  there  should  be  some 
source  to  create  and  issue  sohd  credit  to  sustain 
solvent  houses  in  a  monetary  panic." 

A  bank  as  large  as  the  Credit  Lyonnais,  with 
its  145  branches  and  140,000,000  capital,  needs 
the  support  of  this  source  equally  with  the  hum- 
blest trader.  A  system  of  incorporated  clearing 
houses  can  be  that  source  better  than  a  single 
governmental  bank,  because  it  would  not  produce 
centralization,  but  would  diffuse  its  benefits  over 
the  whole  country. 


CLEARING-HOUSE  CURRENCY         229 

OBJECT    OF    PLAN    IS    STABILITY,    NOT   EXPANSION 
OF    CUKRENCY 

Issues  under  the  supervision  qf  a  clearing  house 
might  be  expected  to  be  made  in  a  safe  and  con- 
servative manner.  The  object  of  the  plan  is  not  so 
much  to  stimulate  business  as  to  give  it  stabilit}^ 
Clearing  houses  are  one  remove  from  the  borrower 
with  his  urgent  requests.  The  element  of  con- 
tingent liability  always  acts  as  a  wholesome  re- 
straint. Yet  the  power  to  support  the  commercial 
community  would  exist  and  could  be  promptly 
used  in  case  of  need.  The  knowledge  of  that  fact 
would  insure  stability  under  the  Anglo-Saxon  sys- 
tem through  the  clearing  house,  as  well  as  under 
the  Latin  system  through  the  single  monoj^olistic 
governmental  bank. 

"NEVER  CLOSE   UP,  BE  ALWAYS   READY  TO 
CLOSE  up" 

Count  MoUien,  minister  of  the  treasury  of  the 
first  Napoleon,  stated  the  following  principle  to  the 
regents  of  the  Bank  of  France,  the  29th  of  May, 
1810:  — 

"  It  is  necessary  that  a  bank  shall  hold  itself  in 
a  condition  to  liquidate  at  any  moment.  In  order 
never  to  close  iij)^  a  haiik  should  always  he  ready 
to  close  w^;."     The  italics  are  his. 

This  is  the  condition  in  which  the  banks  of  the 
United  States  should  be.  They  are  not  in  that 
condition  now ;  their  reserves  are  entirely  inade- 


230  FEDERAL   CLEARING  HOUSES 

quate.  It  behooves  our  lawmakers  to  give  us  a 
bill  to  set  at  rest  forever  the  ability  of  our  banks 
to  take  care  of  themselves  in  any  panic,  however 
violent.  That  end  could  be  reached  by  a  law  in- 
corporating our  clearing  houses  with  power  to 
issue  a  clearing-house  currency. 


XI 


CONTRAST    BETWEEN    AMERICAN     AND   EUROPEAN 
SYSTEMS    OF   BANKING 

In  the  issue  of  the  New  York  "  Commercial 
Advertiser"  of  July  21,  1899,  there  is  a  closely- 
reasoned  and  able  article  bearing  the  title  "  Banks 
and  Finance."  For  the  purpose  of  promoting  the 
discussion  on  this  important  subject,  and  not  in  a 
spirit  of  criticism,  it  may  be  opportune  to  con- 
sider the  trend  of  that  article  and  to  base  thereon 
a  contrast  between  American  and  European  sys- 
tems of  banking,  from  the  standpoint  of  the  for- 
mer and  not  of  the  latter. 

The  article  in  question  may  be  condensed  as 
foUows:  The  writer  says  that  general  European 
experience  approves  a  single  governmental  bank, 
in  which  the  functions  of  issuing  notes  and  lending 
money  are  united,  which  gives  the  bank  the  power 
to  check  credit  speculation  automatically ;  that 
"  public  inexperience  and  distrust  have  so  far  pre- 
vented the  adoption  of  this  system  in  the  United 
States,"  but  the  "  natural  operation  of  economic 
forces  "  has  brought  about  something  resembling 
it  in  the  voluntary  association  of  our  banks ;  and 
that   the  fundamental  objection  of   scientific  stu- 


232  FEDERAL   CLEARING  HOUSES 

dents  to  our  banking  system  has  been  that  the 
separation  of  the  two  banking  functions  of  issuing 
notes  and  lending  money  has  deprived  it  of  the 
automatic  check  found  in  the  European  systems. 

An  approval  of  the  European  system  of  a  single 
ofovernmental  bank  similar  to  that  contained  in 
this  statement  is  often  met,  and  should  be  fairly 
considered.  At  the  start  it  must  be  said  that 
the  real  ground  for  the  approval  is  not  that  the 
European  government  bank  is  single,  or  that  it 
is  governmental,  but  that  it  possesses  the  function 
of  note  issue  on  banking  assets,  and  is  thereby 
enabled  to  support  not  only  the  popular  banks 
which  do  not  have  that  privilege,  but  all  commerce 
and  trade.  The  approval,  therefore,  is  not  neces- 
sarily of  the  way  in  which  the  problem  has  been 
worked  out  in  Europe,  but  of  the  rule  by  which 
it  must  be  solved  in  any  nation.  When  once  the 
vmderlying  principle  of  the  credit  system  is  recog- 
nized, then  the  solution  of  the  banking  problem 
may  be  proceeded  with  in  accordance  with  the  re- 
quirements of  each  individual  nation.  The  gen- 
eralization then,  which  is  the  important  matter,  is 
that  the  credit  system  requires  the  organization  of 
popular  banks  to  do  the  business  of  a  country, 
and  also  the  organization  of  one  or  more  institu- 
tions which  shall  have  the  power  of  note  issue 
on  banking  assets,  and  thus  shall  be  able  to 
come  to  the  support  of  the  popular  banks,  either 
to  facilitate  their  ordinary  business  or  to  protect 
them  and  all  commerce  and   trade  in   times   of 


AMERICAN  AND  EUROPEAN  SYSTEMS     233 

financial  alarm.  If  this  principle  is  recognized,  it 
can  be  applied  to  the  banking  system  of  any  covin- 
try,  whatever  its  kind  of  government  may  be.  In 
countries  accustomed  to  initiative  by  the  govern- 
ment, such  as  Germany,  the  Latin  nations,  Japan 
and  Turkey,  a  single  government  bank  would  be 
preferred,  with  sj)ecially  chartered  popular  banks. 
In  countries  accustomed  to  private  individual  initi- 
ative, where  jealousy  of  monopoly  exists,  as  in  the 
United  States,  all  banks  and  other  financial  insti- 
tutions must  be  organized  under  a  general  law. 

In  the  United  States  we  have  "  so  far  "  only  a 
general  law  organizing  popular  or  multiple  banks, 
with  power  to  issue  notes  only  on  government 
bonds,  which  method  is  delusive  and  valueless  to 
support  credit,  as  every  panic  has  shown.  To 
complete  our  system  in  accordance  with  the  laws 
of  credit,  we  need  another  general  law,  authoriz- 
ing the  organization  of  institutions  with  power  to 
issue  notes  on  banking  assets  for  the  support  of 
banks  and  commerce.  When  this  is  accom- 
phshed,  our  system  will  be  completed  and  made 
parallel,  though  not  uniform,  with  European  sys- 
tems. 

The  banking  systems  of  Europe  have  been  com- 
pleted in  an  easy  and  direct  way,  though  in  dis- 
regard of  our  ideas  of  popular  rights,  by  the 
creation  of  their  specially  chartered  government 
banks  with  the  power  of  note  issues.  Our  system, 
therefore,  lacks  a  corresponding  member,  note- 
issuing  institutions,  to  make  comparison  between 


234  FEDERAL   CLEARING  HOUSES 

the  two  equal.  This  member  or  counterpart  may- 
be supposed  to  exist  and  then  a  perfect  compari- 
son can  be  made.  The  lack  of  a  member  is  a 
reason  for  supplying  it,  and  not  for  destroying  the 
system  and  building  anew  from  the  bottom  on 
another  model. 

The  laws  of  the  credit  system  may  be  complied 
with  under  any  form  of  government,  whatever  the 
banking  system  is  which  has  been  adapted  to  it. 
A  banking  system  of  any  country  is  a  growth 
which  conforms  to  the  prevailing  political  prin- 
ciples of  that  country.  It  can  be  easily  traced  in 
any  instance,  and  a  knowledge  of  its  formation 
is  necessary  to  determine  the  kind  of  adjunct  the 
credit  system  requires. 

Our  banking  system  began  with  the  Declara- 
tion of  Independence,  which  is  a  protest  against 
class  legislation  and  monopoly,  and  a  proclama- 
tion in  favor  of  freedom  and  equal  rights.  It  ad- 
vanced a  step  by  the  adoption  of  the  Constitution 
of  the  United  States,  by  which  a  solid  monetary 
system  was  established.  It  was  moulded  again  by 
the  hand  of  General  Jackson  when  he  vetoed  the 
bank  charter  in  1832,  and  thus  overthrew  an 
organization  hostile  to  and  incompatible  with 
republican  institutions,  which  stood  as  the  repre- 
sentative of  specially  chartered  banks.  An  epoch- 
making  step  was  taken  when  banking  in  the 
United  States  was  first  made  truly  republican  by 
the  enactment  of  the  New  York  free  banking  law 
of  1838,  which  was  then  called  a  second  Declara- 


AMERICAN  AND  EUROPEAN  SYSTEMS     235 

tion  of  Independence.  The  principles  of  that  law 
were  made  national  and  fixed  in  enduring  form  by 
the  National  Bank  Act  of  1863.  From  what  has 
heretofore  been  said,  it  will  be  noticed  that  the 
only  point  requiring  adjustment  in  that  law  would 
be  remedied  by  some  provision  or  arrangement  or 
the  incorporation  of  special  institutions  to  make 
issues  of  bank  notes  on  banking  assets.  This 
requires  the  addition  of  a  new  method,  but  not  of 
a  new  principle.  The  principles  of  the  banking 
system  of  the  United  States  are  that  banking 
shall  be  done  under  a  general  law,  with  govern- 
ment supervision,  and  that  the  function  of  the 
issue  of  bank  notes  shall  be  separated  from  that 
of  lending  money. 

Thus  we  have  traced  the  few  steps  in  the  de- 
velopment of  our  present  banking  system.  Thus 
established  it  is  the  logical  result  of  the  principles 
of  the  Declaration  of  Independence,  and  must  be 
recognized  and  accepted,  unless  we  wish  to  take 
the  revolutionary  position  that  the  fundamental 
principles  of  our  government  are  wrong  and  the 
legislation  which  has  grown  out  of  them  shoidd  be 
reversed.  These  are  fair  topics  for  an  academic 
discussion,  but  the  people  of  the  United  States 
have  given  no  token  of  a  desire  to  abandon  their 
political  faith  or  to  retrace  the  steps  of  its  histori- 
cal development. 

If  the  discussion  is  on  the  best  practical  move 
to  be  made  for  the  perfecting  of  our  banking  sys- 
tem in  line  with  the  republican  principles  which 


236  FEDERAL   CLEARING  HOUSES 

have  hithei'to  governed  its  development,  then 
those  must  be  ruled  out  of  order  who  would  briiis: 
up  for  consideration  the  proposition  that  the  sys- 
tem be  abandoned  and  one  adopted  in  its  place 
which  is  the  outgrowth  of  a  different  form  of 
government  and  a  different  state  of  society  from 
ours. 

Nor  can  it  be  said  in  the  light  of  history  that 
"  public  inexperience  and  distrust "  have  been  the 
guiding  motives  that  controlled  our  nation  in  the 
devel(^pment  of  its  banking  system.  The  state 
papers  and  legislative  debates  on  the  subject  of 
banking  and  currency  recall  the  names  of  Ham- 
ilton, Madison,  Gallatin,  Webster,  Marcy,  Ben- 
ton, Dix,  Chase,  McCulloch,  Tilden,  and  many 
others  whose  writings  and  speeches  deserve  more 
study  than  they  receive  from  the  present  genera- 
tion. Can  it  not  be  said  with  a  glow  of  national 
pride  that  our  system  of  free  banking,  under 
general  laws,  with  government  inspection  and  pub- 
lic statements,  springing  from  the  germ  of  inde- 
pendence and  cultured  in  the  soil  of  freedom,  is  a 
model  for  the  world,  and  is  the  crowning  glory  of 
Republican  legislation  ? 

But  coming  down  to  the  present  time,  the 
writer  of  the  article  we  are  considering  thinks  he 
has  found  an  objection  to  the  American  system  of 
banking  in  the  separation  of  the  functions  of  note 
issues  and  lending  money.  As  far  as  banks  in 
the  United  States  have  the  function  of  note  issue, 
it  is  separate.     It  is  a  question,  however,  whether 


AMERICAN  AND  EUROPEAN  SYSTEMS     237 

separation  does  not  exist  in  France  and  Germany 
as  well  as  in  the  United  States.  In  those  two 
nations  both  functions  are  possessed  by  a  single 
government  bank,  or  a  small  number  of  banks, 
but  the  thousands  of  popular  banks,  which  do  the 
greatest  part  of  the  banking  business  of  those 
countries,  do  not  have  the  function  of  note  issue. 
Complete  separation  exists  as  regards  popular 
banks,  and  any  proposal  to  unite  the  two  functions 
in  popular  banks  would  receive  as  little  suj)port  in 
either  of  the  legislative  assemblies  of  those  nations 
as  it  would  in  the  CongTess  of  the  United  States. 

The  objection  to  the  union  of  the  two  functions 
in  popular  banks  is  that  thereby  all  check  to 
credit  speculation  would  be  removed.  The  history 
of  banking  proves  this.  If  collateral  security  on 
which  note  issues  are  to  be  made  must  pass  the 
inspection  of  a  separate  body  of  directors  or  of  a 
loan  committee,  then  the  separation  of  the  func- 
tions becomes  an  automatic  check  to  over-issues 
and  credit  specidation. 

Too  much  may  be  said  of  the  importance  of 
checking  speculation.  In  rooting  up  the  tares, 
much  of  the  good  crop  may  be  lost.  It  is  better 
rather  to  emphasize  the  thought  that  it  is  the  duty 
of  banks  to  facilitate  all  legitimate  business.  The 
first  Napoleon  said  to  his  finance  minister.  Count 
MoUien :  "  You  must  say  to  the  governor  and 
regents  of  the  Bank  of  France  that  they  should 
inscribe  in  letters  of  gold  in  the  place  of  their 
assembly  these  words  :  '  What  is  the  object  of  tEe^^ 

(  UNiVfci^SITY 

V  or  >^ 


238  FEDERAL   CLEARING  HOUSES 

Bank  of  France  ? '  It  is  to  discount  the  credit 
obli orations  of  all  the  commercial  firms  of  France 
at  4  per  cent."  That  the  rate  of  interest  on  call 
loans  reached  16  per  cent,  in  New  York,  as  it  did 
early  in  July,  1899,  is  evidence  of  a  defective 
banking  system.  There  was  nothing  unhealthy  in 
that  temporary  demand  for  money,  and  our  system 
should  have  furnished  the  cash  without  causing  a 
shock  to  credit  which  all  business  felt. 

Since  separation  of  note  issues  is  not  a  peculiar- 
ity of  the  banking  system  of  the  United  States, 
and  does  furnish  the  best  check  to  speculation, 
then  it  must  result  that  the  objection  to  our  sys- 
tem which  "  scientific  students  "  have  is  not  in  the 
separation  of  note  issues,  but  in  the  way  that 
function  is  performed,  and  this  is  a  point  which 
the  article  does  not  refer  to. 

In  France  and  Germany  note  issues  are  based 
on  commercial  obligations  or  banking  assets,  and 
they  give  relief  to  commerce  and  trade.  In  the 
United  States  bank  note  issues  are  based  on  gov- 
ernment bonds,  and  therefore  they  afford  little 
relief  or  assistance  to  the  commercial  community. 
When  a  bank  takes  out  currency  on  bonds  it 
diminishes  its  power  to  aid  its  customers. 

The  great  question  which  the  United  States  has 
to  solve  is  how  to  secure  the  benefit  of  note  issues 
on  banking  assets  and  yet  preserve  the  benefits 
which  come  from  separation  of  the  function  of 
note  issues  from  popular  banks.  "  Public  opin- 
ion," says   our  writer  truly,  "  will  not   permit  a 


AMERICAN  AND  EUROPEAN  SYSTEMS     239 

government  bank  "  in  tlie  United  States.  Nor  will 
public  opinion  favor  the  giving  the  power  of  note 
issue  on  banking  assets  in  their  own  hands  and 
under  their  own  control  to  four  thousand  popular 
banks  all  over  the  country.  Coining  money,  for 
that  is  what  issuing  bank  notes  amounts  to,  is  a 
sovereign  power,  the  exercise  of  which  should  not 
be  delegated  by  Congress  except  with  the  amplest 
guarantees  and  the  most  perfect  restrictions. 

Our  writer  has  foreshadowed  the  solution  of  the 
difficidty  in  saying  that  "  economic  forces  compel 
a  union  of  private  [popular]  banks  for  common 
performance  of "  this  function.  In  no  other 
place  is  the  union  of  popular  banks  more  com- 
plete than  in  the  clearing  house.  Because  the 
American  method  of  note  issues  does  not  give  aid, 
support,  or  relief  to  the  business  community,  there- 
fore it  is  that  sentiment  is  increasing  in  favor  of 
a  system  of  federal  clearing  houses,  with  power 
to  perform  the  function  of  note  issue  as  it  is  per- 
formed by  the  banks  of  issue  in  France  and  Ger- 
many. Separation  with  all  its  benefits  would  still 
be  maintained,  but  bank  notes  would  be  issued  in 
a  way  to  be  of  service  to  the  business  world. 

The  system  of  federal  clearing  houses  would 
be  formed,  as  the  system  of  national  banks  is, 
by  a  general  law  of  Congress.  The  form  of  the 
law  would  be  similar  to  the  National  Bank  Act. 
Under  it  all  clearing  houses  would  be  incorporated, 
and  provision  would  be  made  for  one  clearing- 
house of  issue  in  each  State,  with  power  to  issue 


240  FEDERAL  CLEARING  HOUSES 

currency  to  bank  members  on  pledge  of  banking 
assets.  The  holders  of  such  currency  would  be 
guaranteed  against  loss  in  the  same  way  that  hold- 
ers of  clearing-house  certificates  now  are  under  the 
rules  of  the  New  York  Clearmg  House.  The  sys- 
tem provides  also  that  all  bank  members  of  clear- 
ing houses  shall  accept  the  notes  of  all  clearing 
houses  in  payment  of  all  dues  to  them,  thus  main- 
taining the  notes  at  par  from  one  end  of  the 
country  to  the  other. 

This  system  derives  its  features  from  the  bank- 
ing legislation  of  our  States  and  the  Congress.  It 
takes  the  broad  foundation  of  popular,  multiple 
banks  organized  under  a  general  law  in  accordance 
with  the  genius  of  our  institutions,  and  builds 
upon  it  a  su.perstructure  of  clearing  houses,  thus 
completing  our  financial  edifice  and  making  it  a 
harmonious  whole.  It  first  legalizes  the  associa- 
tion of  banks  in  clearing  houses  and  then  enlarges 
their  powers  to  enable  them  to  meet  all  the  re- 
quirements of  the  commerce  of  our  country.  This 
system  is  the  outgrowth  of  our  own  institutions,  and 
it  solves  the  banking  question  in  our  own  way.  It 
would  make  banking  freer  even  than  it  is  now. 
The  chief  merit  of  such  a  system  is  that  it  pro- 
vides sure  protection  against  monetary  panics,  by 
establishing  sources  for  the  issue  of  solid  credit  in 
times  of  financial  alarm. 

At  present  the  association  of  our  banks  in  clear- 
ing houses  is  voluntary,  as  our  winter  says  ;  but 
to  be  efficient  and  responsible    and  amenable    to 


AMERICAN  AND  EUROPEAN  SYSTEMS     241 

government  control,  clearing  houses  should  be  in- 
corporated under  a  federal  law.  To  federal  clear- 
ing houses  can  be  safely  given  all  the  power  needed 
to  cope  with  any  panic.  The  power  to  control  a 
panic  must  be  greater  than  the  disturbing  force  of 
the  panic. 

In  a  federal  clearing  house  is  found  the  Ameri- 
can counterpart  of  a  governmental  bank,  but  it  is 
as  different  therefrom  as  a  president  is  from  a 
king.  A  clearing  house  is  democratic,  while  a 
governmental  bank  is  aristocratic.  A  federal 
clearing  house  is  the  result  of  "  the  natural  opera- 
tion of  economic  forces  "  under  republican  guid- 
ance. 

So  at  last  we  agree  with  the  writer  of  the  arti- 
cle under  consideration,  and  find  in  the  voluntary 
union  forced  on  our  banks  by  stress  of  circum- 
stances the  suggestion  of  a  legal  union  on  the 
same  theory,  and  following  the  same  practice  which 
the  experience  of  fifty  years  has  found  to  be  above 
criticism,  and  the  suggestion  of  a  system  which 
would  be  more  beneficent  in  its  results  than  are 
any  of  the  banking  systems  of  Europe. 


XII 


BANK   NOTE   ISSUE    A   PUBLIC    DUTY,  NOT   A   BUSI- 
NESS   FOR   PROFIT 

In  his  speech  before  the  Senate  on  the  18th  of 
March,  1834,  Daniel  Webster  said :  "  Banks  are 
made  for  the  borrowers.  They  are  made  for  the 
good  of  the  many  and  not  for  the  good  of  the 
few."  Exactly  the  opposite  of  this  opinion  of  our 
great  statesman  seems  to  be  held  by  many  who 
act  as  if  banks  were  created  by  the  government 
and  received  their  privileges  and  powers  solely  for 
the  purpose  of  making  money  for  their  stockhold- 
ers. The  true  doctrine  which  should  govern  all 
legislation  in  reference  to  banks  is  that  stated  by 
Webster,  —  that  they  are  formed  to  promote  the 
business  interests  of  the  country  and  not  exclu- 
sively or  primarily  for  their  own  profit. 

All  proposed  changes  in  our  banking  system 
should  be  judged  by  this  criterion. 

The  proposition  to  give  the  right  of  note  issue 
to  thousands  of  banks,  big  and  little,  all  over  the 
country,  is  fraught  with  danger  to  the  entire  na- 
tion, and  that  consideration  alone  should  shut  off 
any  further  discussion  of  the  subject.  Note  issues 
by  a  few  large  banks,  with  many  branches,  squeez- 


BANK  NOTE  ISSUE  A   PUBLIC  DUTY     243 

ing  the  life  out  of  all  local  banks  and  creating  a 
money  aristocracy,  would  be  foreign  to  our  insti- 
tutions and  incompatible  with  the  public  good. 

These  are  forms  of  "  bank  usurpation  ''  which 
can  never  be  tolerated  in  a  free  country,  and  they 
justly  encounter  the  opposition  of  all  who  have  the 
welfare  of  our  country  at  heart.  But  the  ques- 
tion still  remains  to  be  discussed  whether  or  no 
bank  note  issues  in  some  form  may  not  be  a  bene- 
fit to  the  community.  Are  there  not  modes  of 
bank  note  issues  whose  first  object  is  the  protec- 
tion of  business  from  panic  and  disaster  or  its 
facilitation  in  tunes  of  special  activity,  and  whose 
secondary  object  is  the  profit  to  the  banks  ?  Such 
modes  would  not  be  "  usurpation,"  but  the  assump- 
tion by  or  the  imposition  on  the  banks  of  a  public 
duty. 

Let  us  consider  that  aspect  of  the  question.  By 
the  credit  system  which  has  now  been  in  operation 
for  over  two  hundred  years,  banks  and  all  persons 
engaged  in  trade  and  commerce  transact  their  busi- 
ness, not  by  barter,  but  by  maintaining  on  hand  in 
cash  only  a  sufficient  percentage  of  their  debts  to 
keep  the  whole  ahve,  or  liquid. 

The  amount  of  credits  and  debits  created  by 
the  credit  system  is  five  or  six  times  the  amount 
of  the  cash  reserve.  This  method  of  doing  busi- 
ness is  authorized  by  appropriate  legislation  m  the 
form  of  banking  and  other  laws. 

Occasional  junctures  will  happen,  caused  by  un- 
usual catastrophes,  when  much  more  currency  is 


244  FEDERAL   CLEARING  HOUSES 

wanted  by  the  community  than  the  law  requires 
banks  to  keep  on  hand  as  a  reserve.  That  is,  it 
may  occasionally  happen  that  a  bank  which  has 
conformed  to  the  requirements  of  the  law  is  left 
unprotected  and  has  the  disagreeable  alternative 
presented  to  it  of  going  into  the  hands  of  a  receiver 
or  forcing  liquidations  on  its  customers,  thereby 
creating  a  panic,  with  its  untold  sufferings.  To 
meet  this  domestic  demand  some  experienced 
writers  and  bankers  advocate  giving  to  one  fed- 
eral clearing  house  in  each  State  the  power  pos- 
sessed by  the  government  banks  of  Europe,  of 
issuing  to  their  bank  members  currency  secured 
by  pledge  of  banking  assets  with  ample  margin, 
such  currency  to  be  received  at  par  by  all  banks 
for  all  dues  to  them.  This  is  proposed,  not  for 
the  profit  there  is  in  it  to  the  banks,  but  for  the 
security  and  benefit  which  would  flow  therefrom  to 
the  people.  Some  banks  might  object  to  this 
plan,  and  the  answer  to  them  is  that  it  is  not  just 
to  the  business  community  to  expose  them  to  the 
danger  of  forced  liquidation  because  no  other  way 
of  supporting  the  banks  is  provided  by  law  except 
their  destruction. 

The  writers  of  the  article  on  "  Bank  Usurpa- 
tion "  in  the  issue  of  the  16th,  and  of  the  money 
article  of  the  14th  of  August,  1899,  of  the  New 
York  "  Sun,"  offer  as  a  solution  of  the  currency 
question  that  required  elasticity  may  be  had  in 
crises  such  as  above  described  by  allowing  people 
to  deposit  gold  with  the  United  States  Treasury 


BANK  NOTE  ISSUE  A  PUBLIC  DUTY     245 

and  get  an  equal  amount  of  currency  to  supply 
their  wants.  The  difficulty  with  the  operation  of 
this  plan  is  that  in  such  circumstances  the  gold 
and  other  legal  tender  money  has  vanished  because 
it  is  all  owed  five  times  over  and  the  creditors  have 
called  for  it  That  is  the  cause  of  the  trouble. 
This  "  true  scientific  "  scheme  cannot  therefore  be 
put  in  operation  at  its  first  step,  because  it  requires 
the  deposit  of  gold,  and  there  is  no  gold  to  de- 
posit. 

Must  we  go  on  forever  with  alternations  of  con- 
fidence and  panic,  prosperity  and  disaster,  and 
meekly  acknowledge  that  no  solution  of  the  bank- 
ing question  can  be  found  ?  Should  we  not  rather 
endeavor  to  find  a  method  of  bank  note  issue  which 
will  be  safe,  scientific,  and  for  the  common  weal? 
While  European  nations  have  solved  the  banking 
question  in  accordance  with  their  system  of  gov- 
ernment, can  we  not  solve  it  in  accordance  with 
republican  principles  ?  Or  do  our  national  theo- 
ries fail  when  applied  to  the  banking  question  ? 

The  evidence  is  not  clear  that  the  banks  are 
endeavoring  to  usurp  a  valuable  prerogative  at  the 
expense  of  the  business  connnunity.  The  public 
looks  to  Congress  for  protection  against  all  "  bank 
usurpation."  There  resides  the  only  power  which 
can  impose  on  the  banks  the  duty  of  making  note 
issues  not  primarily  for  their  own  profit,  but  for 
the  benefit  of  the  nation. 

The  banks  of  our  country  in  all  its  crises,  from 
the  Revolution  down  to  the  war  with  Spain,  have 


246  FEDERAL   CLEARING  HOUSES 

always  shown  a  sincere  and  true  patriotism.  It 
only  remains  for  Congress  to  devise  a  plan  to  pro- 
tect the  country  from  monetary  disorders,  and  the 
cordial  cooperation  of  the  banks  may  be  relied  on, 
in  the  future  as  in  the  past,  to  help  carry  it  out, 
whatever  may  be  the  duties  and  responsibilities 
which  the  plan  may  impose  upon  them. 

comments  by  the  editor  of  the  new  york 

"sun" 

Mr.  Gilman  confounds  legal  tender  money  with 
currency,  and  a  scarcity  of  currency  caused  by  a 
demand  for  it  in  effecting  exchanges  with  a  con- 
traction of  bank  credits  which  leads  to  a  panic. 
A  panic  is  never  caused  by  a  scarcity  of  currency, 
and  it  cannot  be  cured  by  increasing  the  voliune 
of  currency.  It  is  caused  by  an  impairment  of 
men's  confidence  in  one  another's  solvency,  and 
comes  to  an  end  as  soon  as  that  confidence  is  re- 
stored. It  is  not  true  that  in  times,  of  panic 
"  there  is  no  gold  to  deposit."  If  it  is  lacking  in 
one  country  it  can  be  found  in  another,  and  can 
be  brought  where  it  is  wanted,  as  it  was  brought 
from  Europe  to  this  country  in  1893.  So  long  as 
men  will  indulge  in  speculations  beyond  their 
means,  we  must  "  go  on  forever,  with  alternations 
of  confidence  and  panic,  prosperity  and  disaster," 
and  no  tinkering  with  bank  currency  wiU  prevent 
it.  The  best  that  can  be  done  is  to  mitigate  the 
severity  of  the  catastrophes,  and  that  is  accom- 
plished, as  we  have  seen  many  times,  by  the  action 


BANK  NOTE  ISSUE  A  PUBLIC  DUTY     247 

of  the  banks  among  themselves,  under  existing 
conditions,  without  the  issue  of  currency.  Con- 
gress can  no  more  "protect  the  country  from 
monetary  disorders  "  than  it  can  protect  it  from 
floods,  droughts,  tornadoes,  or  forest  fires. 


XIII 

"  BANK   USUKPATION  " 

Reply  to  the  Comments  of  the  New  York  "  Sun  "  on 

Bank  Note  Issue  a  Fuhlic  Duty,  not  a  Business  for 

Profit 

The  comments  on  the  letter  published  in  the 
"  Sun  "  of  the  25th  of  August,  1899,  state  a  view 
of  the  currency  question  held  by  many,  and  an 
endeavor  seems  to  be  called  for  to  clear  up  some 
of  the  points  connected  with  this  important  subject 
on  which  there  may  be  more  accord  than  appears 
on  the  surface. 

Michel  Chevalier,  a  high  French  authority  on 
finance,  has  congratulated  English-speaking  people 
on  the  possession  of  the  word  "currency,"  for 
which  no  exactly  corresponding  term  is  found  in 
the  French  langaiage.  The  definition  of  the  word 
lies  at  the  threshold  of  the  discussion.  How  much 
more  it  includes  than  legal  tender  money  and  bank 
notes  authorized  by  law  to  circulate  as  money,  or 
whether  any  more,  is  a  subject  of  dispute,  but  it  is 
generally  accepted  that  it  must  be  extended  so  far. 
Without  touching  on  any  controverted  point,  the 
word  "  currency  "  may  be  used  to  designate  both 
legal  tender  money  and  bank  notes.     All  currency 


BANK  USURPATION  249 

is  used  for  transacting  the  business  of  the  country, 
but  only  legal  tender  money  can  form  bank  re- 
serves or  be  offered  by  private  parties  in  payment 
of  debts,  and  it  has  therefore  been  called  "  basic  " 
or  "  primary  "  money. 

The  bank  reserves  of  our  country  are  about 
sixteen  per  cent,  of  bank  obligations,  not  including 
those  of  trust  companies  or  savings  banks.  This 
percentage  on  its  face  is  too  small,  and  our  expe- 
rience has  shown  that  it  falls  to  what  Bagehot 
calls  the  "  apprehension  minimum  "  on  shght  pro- 
vocation. When  such  a  fall  takes  place  the  banks 
must  set  about  restoring  their  reserves  from  the 
reservoir  of  the  public.  The  public  then  takes 
fright  at  the  condition  of  the  banks  and  at  their 
restrictive  measures,  and  proceeds  to  fortify  its 
private  reserves  by  hoarding  currency  of  all  sorts 
drawn  from  the  banks  and  the  public.  Under 
our  banking  system  there  is  no  way  of  protecting 
reserves  except  at  the  expense  of  the  public. 

It  is  evident  that  reserves  of  legal  tender  money 
could  be  protected  if  the  banks  could  meet  tempo- 
rary demands  in  any  form  of  currency  acceptable 
to  the  public.  To  be  acceptable  it  must  be  solid 
and  independent  of  the  banks.  A  bank  cannot  pay 
its  debts  in  its  own  notes,  nor  can  a  man  meet  his 
obligations  in  that  way.  The  notes  must  there- 
fore be  issued  by  one  or  more  corporations  inde- 
pendent of  popular  banks,  and  those  corporations 
must  be  secured  by  pledge  of  satisfactory  collate- 
ral.    The  notes  must  be  acceptable  to  all  bonks, 


250  FEDERAL   CLEARING  HOUSES 

so  that  their  use  in  business  transactions  shall  be 
unrestricted.  Such  notes  would  not  be  legal  ten- 
der ;  but  being  authorized  by  law  to  circulate  as 
money,  and  being  solid  in  character  and  of  univer- 
sal acceptance,  and  being  obtainable  by  pledge  of 
banking  assets  to  the  limit  of  the  capital  of  each 
bank,  the  great  creditor  of  the  banks,  the  public, 
would  accept  them  as  money. 

By  the  aid  of  such  notes,  the  banks  could  meet 
temporary  demands  without  paying  out  their  legal 
tender  money,  which  would  thus  be  held  to  meet 
foreign  demands.  This  would  protect  the  legal 
tender  reserves,  and  their  decline  to  an  "  appre- 
hension minimum  "  from  any  domestic  demands 
would  be  avoided.  An  issue  of  bank  note  cur- 
rency of  this  character  would  afford  a  complete 
protection  against  monetary  panics  of  a  domestic 
nature,  because  they  arise  only  from  the  low  con- 
dition of  banking  reserves  and  never  from  lack  of 
confidence  between  men  in  each  other's  solvency, 
which  is  the  effect  of  a  panic,  not  its  cause. 

Panics  have  always  been  calmed  by  an  issue  of 
undoubted  currency.  Montague,  Lord  Halifax, 
so  quieted  the  monetary  disorders  of  1696  when 
the  Bank  of  England  suspended  payment,  two 
years  after  it  commenced  business,  because  its  re- 
serve had  fallen  to  less  than  three  per  cent,  of  its 
demand  obligations.  Senator  Benton,  in  debate  on 
Webster's  "Plan  for  an  Exchequer,"  said  Walpole 
made  similar  issues.  Sir  Francis  Baring  in  1797 
tells  us  how  the  panic  of  1793  was  dissipated  by 


BANK  USURPATION  251 

the  issue  to  merchants  and  others,  by  a  parliamen- 
tary commission,  of  exchequer  bills  on  pledge  of 
collateral  —  a  method  in  all  points  similar  to  that 
pursued  by  a  loan  committee  of  a  modern  clearing 
house.  The  Bullion  Eeport  of  1810  says  that  an 
expansion  of  the  currency  is  the  true  remedy  for  a 
panic,  a  dictum  to  which  subsequent  authorities 
have  generally  given  their  adhesion.  Webster's 
"  Plan  for  an  Exchequer  ''  was  based  on  this  prin- 
ciple. In  numerous  panics  in  this  country  from 
1857 'down,  we  have  seen  issues  of  clearing-house 
certificates  which  have  alleviated  panics,  though 
entirely  inadequate  to  prevent  them,  by  allowing 
an  expansion  of  the  currency  beyond  that  per- 
mitted by  law.  McLeod  shows  that  all  modern 
English  panics  have  been  abated  in  the  same  way. 

The  chain  of  historical  evidence  is  complete 
from  the  founding  of  the  credit  system  to  the  pre- 
sent day,  all  confirming  beyond  possibility  of  dis- 
pute the  dictum  of  the  Bullion  Report  of  1810, 
that  the  true  mode  of  quieting  a  panic  is  by  in- 
creased issues  of  currency.  Professor  Sumner's 
comment  is  that  the  currency  described  must  be 
of  a  kind  that  will  not  fail  in  the  wildest  panic. 

Perhaps  the  subject  may  be  made  more  clear  by 
markins:  the  distinction  between  commercial  and 
monetary  crises.  A  commercial  panic  in  wheat  or 
real  estate  or  stocks  comes  from  over-trading.  A 
monetary  panic  comes  from  a  depletion  of  bank 
reserves,  from  whatever  cause.  Errors  of  judg- 
ment in  speculation    may  be  expected  while    the 


252  FEDERAL   CLEARING  HOUSES 

world  stands.  The  banking  system  should  be  able 
successfully  to  resist  such  strains.  The  collapse  of 
the  copper  syndicate  in  France  produced  a  com- 
mercial crisis,  but  not  a  monetary  one,  because  the 
French  bankmg  system  is  strong  enough  to  with- 
stand such  pressures. 

A  further  distinction  should  be  made  between 
a  catastrophe  caused  by  a  monetary  panic  spring- 
ing from  the  defective  laws  of  man,  and  a  cata- 
strophe caused  by  the  violent  action  of  the  laws  of 
nature.  Man  did  not  make  the  laws  of  nature, 
and  has  no  control  over  them.  We  must  distin- 
guish between  an  act  of  Congress  and  an  act  of 
God.  German  and  French  banking  laws  show  us 
that  panics  can  be  avoided,  as  they  have  been  in 
those  countries  since  ajjpropriate  banking  laws 
have  been  enacted.  Professor  Dunbar  makes  this 
clear  as  to  the  German  law.  But  no  laws  of  man 
have  ever  curbed  the  violence  of  a  tornado. 
Banking  is  a  creation  of  man,  and  he  can  control 
it  and  prevent  it  from  being  disordered  by  making 
the  system  conform  to  the  simple  laws  of  credit. 

In  the  comments  referred  to  above,  all  is  con- 
ceded that  is  needed  to  avoid  panics.  The  words 
are :  "  The  best-  that  can  be  done  is  to  mitigate 
the  severity  of  the  catastrophes,  and  that  is  ac- 
complished, as  we  have  seen  many  times,  by  the 
action  of  the  banks  among  themselves,  under  exist- 
ing conditions,  without  the  issue  of  currency." 
This  is  a  ray  of  light  to  show  the  way  out  of  the 
cavernous  darkness  in  which  our  banking  system 


BANK  USURPATION  253 

now  gropes.  Tlie  banks  have  mitigated  many 
panics  by  issuing  a  currency  between  banks  called 
clearing-house  certificates.  This  has  been  done 
with  entire  safety,  and  the  principle  on  which  the 
issues  have  been  made  has  been  tested  by  expe- 
rience and  proved  to  be  sound  and  good.  A  cer- 
tificate is  remedial,  not  preventive  ;  local,  not  uni- 
versal ;  extra-legal,  not  legal ;  limited,  not  adequate 
to  the  work  to  be  done. 

It  is  a  simple  matter  to  cure  the  defects  of  the 
clearing-house  certificate,  and  make  it  an  agent 
possessing  sufficient  power  to  prevent  monetary 
panics  in  the  future.  Three  objects  are  to  be 
attained.  Let  it  first  be  legalized  by  the  incor- 
poration of  clearing  houses  under  a  federal  law 
with  power  to  do  legally  what  has  hitherto  been 
done  extra-legally ;  and  secondly,  let  the  currency 
be  authorized  to  circulate  among  the  people  instead 
of  between  banks,  so  that  the  banks  may  thereby 
protect  their  reserves  of  legal  tender  money ;  and 
third,  let  the  benefit  of  this  mitigation  be  enjoyed 
by  all  the  nation  by  gi\^ng  to  one  clearing  house 
in  each  State  the  power  to  issue  such  currency. 

It  is  the  opinion  of  some  of  the  most  prominent 
experts  in  finance  of  our  country  that  domestic 
monetary  disorders  could  not  occur  if  this  plan 
were  adopted  by  Congress. 


XIV 


THE    GOLD    STANDAKD 


By  the  adoption  of  the  Constitution  of  the  Uni- 
ted States  in  1788,  the  country  was  placed  on  a 
gold  basis.  Its  provisions  on  the  subject  are  two- 
fold. In  Section  8  of  Article  I.  it  reads,  "  The 
Congress  shaU  have  power  ...  to  coin  money, 
regulate  the  value  thereof,  and  of  foreign  coin." 
In  Section  10  of  Article  I.  it  reads,  "  No  State 
shall  .  .  .  emit  bills  of  credit ;  make  anything  but 
gold  and  silver  coin  a  tender  in  payment  of  debts." 

Webster  in  commenting  on  these  provisions 
said,  "  The  powers  granted  to  Congress  are  enu- 
merated one  after  another  in  the  eighth  section, 
and  the  prohibitions  to  the  States  in  the  tenth  sec- 
tion. The  grant  to  Congress  is  '  To  coin  money, 
regulate  the  value  thereof  and  of  foreign  coins.' 
The  correlative  prohibition  on  the  States,  though 
found  in  another  section,  is  vmdoubtedly  to  be 
taken  in  immediate  connection  with  the  foregoing 
as  much  as  if  it  had  been  found  in  the  same  clause. 
The  only  just  reading  of  these  provisions,  there- 
fore, is  this  :  '  Congress  shall  have  power  to  coin 
money,  regulate  the  value  thereof,  and  of  foreign 
coin ;  but  no  State  shall  coin  money,  emit  biUs  of 


THE  GOLD  STANDARD  255 

credit,  or  make  anything  but  gold  and  silver  coin 
a  tender  in  payment  of  debts.'  These  provisions 
respect  the  medium  of  payment  or  standard  of 
value,  and  thus  collated  their  joint  result  is  clear 
and  decided."  And  in  his  speech  on  the  Sub- 
Treasury,  delivered  January  31,  1838,  he  said, 
"  Sir,  it  will  be  a  fact  stamped  in  deep  dark  lines 
upon  our  annals,  it  will  be  a  truth  which  in  all 
time  can  never  be  denied  or  evaded,  that  if  tliis 
Constitution  shall  not,  now  and  hereafter,  be  so 
administered  as  to  maintain  a  uniform  system  in 
all  matters  of  trade ;  if  it  shall  not  protect  and 
regulate  the  Commerce  of  the  country,  in  all  its 
great  interests,  in  its  foreign  intercourse,  in  its 
domestic  intercourse,  in  its  navigation,  in  its  cur- 
rency, in  everything  which  belongs  to  the  whole 
idea  of  commerce,  either  as  an  end,  an  agent  or  an 
instrument,  then  that  Constitution  will  have  failed, 
utterly  failed  to  accomplish  the  precise,  distinct, 
original  object  in  which  it  had  its  being." 

The  distinction  was  a  broad  one  in  the  minds  of 
the  people  in  1788.  It  was  a  choice  of  the  metal- 
lic currency  of  the  world  and  a  setting  aside  of  an 
irredeemable  currency.  There  have  been  many 
political  contests  to  overthrow  this  fundamental 
financial  law  of  our  country,  but  the  effort  has 
always  been  in  vain.  Even  when  commerce  and 
trade  were  almost  prostrated  by  successive  panics, 
the  majority  of  the  people  were  found  true  to  the 
national  principle  that  every  dollar  authorized  by 
the  government  to  circulate  as  money,  must  be  as 


256  FEDERAL  CLEARING  HOUSES 

good  in  its  purchasing  power  as   any  and   every 
other  dollar. 

In  view  of  the  fact  that  the  gold  standard  is 
imbedded  in  the  Constitution  and  has  been  re- 
affirmed by  the  popular  vote  again  and  again  in 
national  and  state  campaigns,  the  demand  of  some 
that  an  additional  declaration  should  be  made  by 
Congress  seems  superfluous.  The  people  have 
taken  their  position,  and  there  is  no  fear  that  they 
will  ever  recede  from  it.  But  if  they  choose  to 
change  this  financial  principle,  there  is  no  power 
to  compel  them  to  adhere  to  it.  While  this  may 
be  accepted  as  true,  there  may  yet  remain  some- 
thing to  be  done  in  granting  power  to  the  proper 
official  of  the  government  to  carry  into  effect  the 
will  of  the  people,  and  some  legislation  may  be  re- 
quired to  make  it  a  duty  of  the  secretary  to  see 
to  it  that  the  uniformity  of  the  currency  shall  be 
upheld.  It  is  one  thing  that  a  law  shall  be  per- 
missive and  another  that  it  shall  be  mandatory. 
If  a  law  should  be  passed  by  Congress  making 
it  "  the  duty  of  the  Secretary  of  the  Treasury  to 
maintain  the  gold  reserve  at  such  sum  as  shall  se- 
cure the  certain  and  immediate  redemption  of  all 
notes  and  exchange  of  all  silver  doUars  presented 
at  the  Treasury  of  the  United  States,"  and  author- 
izing him,  "  for  this  purpose  to  issue  and  sell,  for 
gold,  whenever  it  is  in  his  judgment  necessary  to 
the  ends  aforesaid,  and  for  no  other  purpose,  cer- 
tificates of  indebtedness  of  the  United  States 
bearing  interest  at  a  rate  not  exceeding  three  per 


THE  GOLD  STANDARD  257 

centum  per  annum,  payable  in  gold  coin  at  the 
end  of  five  years  but  redeemable  in  gold  coin  at 
the  option  of  the  United  States  after  one  year," 
then  the  question  of  maintaining  the  gold  stand- 
ard woidd  be  settled  as  far  as  legislation  can  settle 
it.  This  is  all  contained  in  the  4th  Section  of 
bill  H.  R.  10,289,  55th  Congress,  commonly 
known  as  the  Committee's  banking  bill.  It  was 
the  intention  of  that  section  to  make  it  mandatory 
on  the  Secretary  of  the  Treasury  to  maintain  the 
gold  standard  and  to  give  him  power  to  carry 
the  mandate  into  effect.  What  more  is  needed 
than  to  compel  the  Secretary  of  the  Treasurj'^, 
when  the  government's  stock  of  gold  is  running 
low,  to  replenish  it,  and  to  designate  the  kind  of 
bond  he  could  sell  to  accomplish  that  object? 

Even  a  secretary  not  in  sympathy  with  gold 
would  hardly  refrain  from  obeying  a  direct  law. 
The  simple  proposition  of  the  Committee  on 
Banking  and  Currency  of  the  House  of  Represen- 
tatives of  the  5  5 til  Congress  would  seem  to  meet 
all  the  requirements  of  the  case  and  dispose  of  the 
question  of  the  standards  forever.  Then  it  would 
become  unnecessary  to  set  aside  in  idleness  a  large 
sum^as  a  reserve  fund.  A  reserve  power  would 
be  as  effective  as  a  cash  reserve. 


XV 


CENTRALIZATION  ;    BRANCH   BANKING 

Few  governments  in  the  world  have  a  greater 
centralization  of  power  than  is  placed  in  the  hands 
of  the  President  of  the  United  States.  Few 
governments,  if  any,  disperse  the  privileges  and 
the  benefits  of  the  nation  so  widely  among  the 
people  as  does  the  government  of  the  United 
States.  It  is  a  political  principle  with  us  that 
there  shall  be  no  privileged  classes,  or  unequal  be- 
stowal of  advantages  in  any  part  of  the  country. 

This  feeling  is  not  based  on  jealousy,  but  upon 
justice  and  an  intelligent  opinion  that  it  is  best 
for  the  country,  as  it  is  for  an  individual,  to  be 
developed  equally  in  every  part.  The  wasting 
away  of  a  member  of  the  body  poorly  nourished 
and  neglected  finds  its  counterpart  in  the  lack  of 
development  of  a  section  of  the  country  which  is 
deprived  of  the  advantages  that  the  most  favored 
enjoy.  Especially  is  this  true  in  reference  to  the 
currency. 

It  is  the  duty  of  the  government,  as  said  by  Sir 
John  Sinclair,  in  1822,  to  promote  an  abundant 
circulation,  especially  in  the  country  districts. 
"It  is  by  means  of  a  country  circulation  that  im- 


CENTRALIZATION ;  BRANCH  BANKING     259 

provements  in  agriculture  can  be  carried  on  with 
spirit,  that  the  produce  of  the  soil,  the  real  basis 
of  national  wealth  and  true  source  of  productive 
industry,  can  be  increased,  that  the  farmer,  the 
first  link  in  the  chain  of  national  circulation,  can 
be  provided  with  a  circulating  medium  which 
through  him  will  soon  pervade  and  enrich  all  the 
other  classes  of  the  community."  ''  In  this  way 
every  part  of  the  nation  may  possess  the  advan- 
tage of  an  abundant  circulation,  and  that  conunand 
of  money,  from  which  the  prosperity  of  commerce 
and  of  manufactures  so  much  originated,  may  be 
also  enjoyed  by  agriculture,  even  in  the  remotest 
districts." 

"  Water  the  roots "  is  an  injunction  which 
should  govern  the  mode  of  distribution  of  the  cur- 
rency. This  cannot  be  accomplished  if  the  money 
of  the  country  is  congested  in  one  place  or  if  it  is 
issued  from  a  single  source.  It  must  be  locally 
issued,  at  the  localities  where  it  is  to  be  employed 
in  trade,  and  where  the  credit  of  borrowers  is  best 
known.  A  clearing  house  of  issue  in  each  State 
would  reach  the  entire  country.  By  this  diffusion 
of  circulation  the  notes  of  farmers  and  local 
traders  could  be  made  the  basis  of  the  issue  of 
currency  when  approved  by  the  local  bankers  and 
the  loan  committee  of  the  clearing  house.  No 
part  of  the  country  would  be  passed  by  in  the  be- 
stowal of  the  benefits  of  circulation.  When  the 
currency  so  issued  has  performed  its  service,  it  is 
redeemed   and    canceled,    and   does   not    seek   a 


260  FEDERAL    CLEARING  HOUSES 

money    centre    to    foster    speculation    until   it   is 
wanted  again. 

The  opinion  is  urged  by  some  that  the  issue  of 
currency  through  branch  banks  will  accomplish 
the  result  of  local  issue.  Branch  banking  is  a 
form  of  centralization  which  can  never  be  made 
to  harmonize  with  our  institutions.  The  example 
of  foreign  nations  is  often  referred  to  with  the 
assertion  that  the  practice  of  branch  banking  is 
almost  universal  among  them.  There  is  no  coun- 
try where  banking  is  more  centralized  than  in 
France,  and  it  is  apropos  to  notice  that  sentiment 
is  not  unanimous  in  its  favor  there.  The  exist- 
ence of  the  French  Country  Bankers'  Association, 
of  which  G.  Vignes,  Troyes,  France,  is  secretary, 
shows  that  there  is  in  that  country  a  decided  op- 
position to  the  system.  The  object  of  the  associa- 
tion, as  stated  in  Article  II.  of  its  Constitution,  is, 
"  To  form  a  centre  for  discussion  and  for  obtain- 
ing information  as  to  the  means  of  resisting  the 
encroachment  in  the  provinces  of  banking  estab- 
lislunents  from  Paris."  The  association  has  offered 
a  prize  of  one  thousand  dollars  for  the  best  essay  on 
"  the  advantages  of  local  banks."  The  offer  says, 
"  The  length  of  time  their  directing  bodies  remain 
unchanged,  the  services  they  render  in  crises,  the 
commimity  of  interests  existing  between  them  and 
their  customers,  the  decentralization  of  the  affairs, 
and  division  of  risks,  the  stimulus  they  give  to 
local  industries,  —  these  are  not  among  their  least 
advantages." 


CENTRALIZATION ;  BRANCH  BANKING     261 

It  will  be  difficult  if  not  impossible,  for  a  long 
time,  for  the  country  bankers  of  France  to  throw 
off  the  yoke  of  the  branch  banking  system,  and  yet 
their  arguments  will  no  doubt  be  accepted  in  this 
country  as  conclusive  to  prevent  the  establishment 
of  the  system  here. 

Financial  centres  shoidd  have  all  the  money 
they  need  to  carry  on  their  business,  and  in  the 
same  way,  though  less  in  amount,  each  part  of  the 
country  should  enjoy  equal  advantages.  There 
should  be  ability  to  centralize  the  financial  power 
of  the  nation  and  use  it  when  occasion  demands 
for  the  benefit  of  all,  and  there  should  also  be  a 
diffusion  of  financial  benefits  by  means  of  a  lo- 
cally issued  circulation.  By  this  means  the  whole 
country  would  be  equally  developed,  each  State 
would  have  the  control  of  its  own  finances,  the 
pressure  would  be  relieved  which  is  now  periodi- 
cally felt  in  large  money  centres,  and  centralization 
would  no  longer  be  the  complaint  of  one  section 
against  another. 


XVI 

THE   CLEARING    HOUSE 

How  it  may  he  utilized  m  the  Issue  of  a  Bank  Credit 
Currency 

In  the  "  Bankers'  Magazine  "  of  New  York  for 
February,  1899,  John  H.  Blacklock,  of  Baltimore, 
Md.,  gave  the  banking  public  a  most  valuable  and 
comprehensive,  as  well  as  able,  article  on  ^'  The 
Clearing-House,  Its  Constitution,  Rules,  and  Prac- 
tical Working  Forms."  The  article  is  timely,  for 
it  treats  of  a  subject  hardly  second  in  importance 
to  any  other  which  commands  the  attention  of  the 
business  community. 

CLEARING    HOUSES    REPRESENTATIVE    IN    CHARAC- 
TER 

The  first  and  fundamental  characteristic  of  a 
clearing  house  as  described  by  Mr.  Blacklock  is 
that  it  is  based  on  the  principle  of  equality  and 
representative  government.  Every  bank  joining 
a  clearing  house  is  the  equal  in  rights  and  privi- 
leges of  any  other  bank.  The  rules  of  the  asso- 
ciation apply  equally  to  all.  Section  4  of  Article 
IV.  of  Mr.  Blacklock's  constitution  reads  :  "  At 
all   meetings   a  majority  of   the  members  of  the 


THE   CLEARING  HOUSE  263 

association  shall  be  a  quorum  for  the  transaction 
of  business.  All  motions  and  questions  shall  be 
decided  by  a  majority  of  the  members  present 
except  where  it  is  otherwise  ordered  in  this  con- 
stitution." The  exception  seems  to  be  in  the 
issue  of  clearing-house  certificates,  when  "  a  vote 
of  three  fourths  of  all  the  members  of  the  asso- 
ciation "  is  required  to  authorize  their  issue. 

These  provisions  make  of  the  clearing  house  a 
miniature  republic,  and  as  such  it  is  in  harmony 
with  a  government  of,  by,  and  for  the  people. 

MEMBERSHIP    SHOULD  BE  A  RIGHT  AND   PRIVILEGE 

The  next  consideration,  to  make  the  clearing 
house  acceptable  to  the  citizens  of  a  republic,  is 
that  membership  therein  shall  be  the  right  and 
privilege  of  every  bank,  duly  organized  under 
state  or  national  law.  That  is,  the  possession  by 
a  national  bank  of  a  certificate  from  the  comptrol- 
ler of  the  currency  that  '^  such  association  has 
complied  with  all  the  provisions  required  to  be 
complied  with  before  commencing  the  business  of 
banking,  and  that  such  association  is  authorized  to 
commence  such  business,"  should  entitle  said  bank 
to  membership  by  simply  filing  this  certificate 
with  the  clearing-house  association. 

A  state  bank  duly  authorized  by  a  state  super- 
intendent of  banking  to  do  business  as  a  state 
bank  should  also  have  the  same  right  and  privi- 
lege of  membership  on  presentation  of  a  regular 
certificate. 


264  FEDERAL   CLEARING  HOUSES 

To  require  further  examinatiou,  or  to  Impose 
any  other  tests  or  conditions,  would  be  an  expres- 
sion of  doubt  as  to  the  thoroughness  of  the  inspec- 
tion by  the  comptroller  or  superintendent  or  of 
the  value  of  their  recommendations. 

By  these  provisions  the  right  to  membership  in 
the  clearing  house  woidd  be  as  free  as  the  right 
of  an  adult  citizen,  duly  enrolled,  to  vote. 

If  this  were  not  the  case,  it  is  evident  that  local 
competition  or  jealousy  might  control  the  banking 
of  a  city  or  other  locality.  The  organization  of 
the  clearing  house  should  be  free  from  all  taint 
of  monopoly,  and  the  republican  spirit  which  de- 
mands general  laws  and  free  banking  should  con- 
trol in  the  formation  of  clearing  houses  as  in  that 
of  popular  banks. 

SUSPENSION    OF   MEMBERS    BY   REGULAR    PROCESS 

No  national  or  state  bank  should,  on  the  other 
hand,  be  deprived  of  its  clearing-house  member- 
ship except  when  it  is  in  default  or  when  the  comp- 
troller or  superintendent  has  appointed  a  receiver 
therefor.  That  is,  all  summary  and  irregular 
action,  which  may  be  prompted  by  other  consid- 
erations than  those  of  solvency,  should  be  carefully 
guarded  against.  The  provisions  contained  in 
Section  4  of  Article  II.  and  Section  4  of  Article 
V.  of  Mr.  Blacklock's  constitution,  which  prescribe 
the  mode  of  suspension,  are  excellent  in  scope  and 
effect,  and  perhaps  do  not  require  any  change. 
These   two  sections  provide  against  aU  arbitrary 


THE  CLEARING  HOUSE  265 

action  which  might  unjustly  deprive  a  bank  mem- 
ber of  its  rights.  Such  protection  is  needed  to 
secure  the  confidence  of  all  stockholders  and  de- 
positors. 

The  three  points  above  referred  to  are,  first, 
that  the  clearing  house  should  be  democratic,  and 
second,  that  it  should  be  free  to  all,  and  tliird, 
that  the  rights  of  all  its  members  should  be  care- 
fidly  preserved  and  no  member  should  be  deprived 
of  any  except  by  due  process  of  law. 

CLEARING     HOUSES     SHOULD     BE     INCORPORATED 
BY   THE    GOVERNMENT 

It  immediately  becomes  evident  that  if  a  sys- 
tem of  clearing  houses  is  to  be  established  having 
these  characteristics,  it  can  be  accomplished  only 
by  a  general  federal  law  providing  for  the  incor- 
poration of  clearing  houses.  Such  a  law  would 
simply  authorize  the  formation  of  clearing  houses, 
in  the  same  way  that  the  National  Bank  Act  pro- 
vides for  the  formation  of  national  banks,  or  a 
state  law  provides  for  the  formation  of  state  banks. 
The  National  Bank  Act  allows  some  latitude  in 
the  articles  of  association,  requiring  only  that  they 
"  shall  specify  in  general  terms  the  object  for 
which  the  association  is  formed,  and  may  contain 
any  other  provisions,  not  inconsistent  with  law, 
which  the  association  may  see  fit  to  adopt  for  the 
regulation  of  its  business  and  the  conduct  of  its 
affairs."  The  whole  act,  however,  in  a  sense  be- 
comes the  by-laws  of  every  national  bank.     So  an 


266  FEDERAL   CLEARING  HOUSES 

act  incorporating  clearing  houses  need  only  out- 
line the  salient  features  of  such  an  association  and 
leave  each  to  make  rules  for  its  government.  Some 
clearing  houses  would  need  but  few  rules ;  others, 
with  more  complex  and  greater  interests  and 
questions  to  guard,  would  require  more  elaborate 
rules. 

CHIEF  REQUIREMENT,  A  GENERAL  LAW 

But  the  cliief  thought  underlying  the  whole 
subject  is  that  in  a  democratic  country  with,  a 
representative  government,  in  wliich  all  questions 
are  decided  by  a  majority  vote,  banks  and  all 
other  organizations  can  form  a  union  only  on  the 
pohtical  principles  which  constitute  the  basis  of 
our  government. 

PROVISION  FOR  A  CLEARING-HOUSE  CURRENCY 
If  the  law  mider  which  clearing  houses  are 
organized  is  a  federal  law,  and  prevails  over  the 
whole  country,  it  would  then  be  possible  to  pro- 
vide for  a  clearing-house  currency  mstead  of  clear- 
ing-house certificates.  The  federal  power  alone 
can  do  this.  A  currency  issued  in  the  same  man- 
ner as  provided  for  the  issue  of  certificates  would 
be  as  safe  as  certificates  are.  If  issued  as  cur- 
rency in  all  denominations  from  one  dollar  up,  the 
banks  could  pay  them  out  to  their  customers  and 
thus  keep  their  legal  reserves  without  diminution. 
Clearintr-house  certificates  weaken  the  banks  issu- 
ing  them,  as  well  as  the  banks  that  receive  them, 


THE  CLEARING  HOUSE  267 

by  displacing  legal  reserves.  A  clearing-house 
currency  so  issued,  limited  in  amount  to  tlie  par 
of  the  capital  of  any  bank,  would  provide  the 
banks  with  a  resource  which  would  strengthen  and 
protect  them  against  any  panic. 

THE  CLEARING  HOUSE  TAKES  THE  PLACE  OF  A 
GOVERNMENT  BANK 

In  monarchical  countries  the  single  governmental 
bank  supports  all  the  popular  banks  with  its  power 
of  issue  and  great  reserve.  In  a  country  where  a 
representative  government  prevails,  the  clearing 
house  may  be  developed  to  afford  more  perfect 
protection  than  a  governmental  bank,  not  only  to 
all  banks,  but  to  the  whole  business  community. 

The  thoughts  of  financial  men  are  now  turning 
towards  the  development  of  the  clearing  house  as 
the  means  by  which  this  country  may  reach  mone- 
tary stability  and  freedom  from  panics,  and  Mr. 
Blacklock's  article  is  a  great  help  in  the  direction 
of  showing  how  simple  the  formation  of  a  clearing 
house  is,  and  how  great  the  advantages  would  be 
to  the  whole  country  from  the  wide  extension  of 
the  system. 


XVII 

LIQUIDATION,    COMMERCIAL   AND   BANK 

Used  in  tlie  sense  in  which  it  is  cm^ent  in 
business  circles,  the  word  "  liquidation  "  means  the 
turning  of  a  debt  or  an  ownership  in  any  property 
into  cash.  Thus  liquidated  wealth  is  spoken  of  to 
describe  property  of  a  character  so  convertible  as 
to  be  readily  converted  into  cash.  Assets  are 
called  liquid  when  they  possess  the  property  of 
convertibility.  Liquidation  is  the  end  of  a  busi- 
ness transaction,  because  by  it  property  which 
could  be  used  only  to  purchase  other  property  by 
barter,  is  by  liquidation  transformed  into  money, 
which  is  a  means  by  which  any  property  offered 
for  sale  may  be  bought,  or  a  legal  tender  by  which 
any  debt  may  be  satisfied.  By  liquidation  an 
account  is  closed,  and  the  profit  or  loss,  which  can 
only  be  estimated  after  liquidation  has  taken  place, 
is  realized. 

What  may  be  called  commercial  liquidation 
occurs  when  the  principal  or  owner  has  carried 
through  his  transaction  to  its  natural  ending,  and, 
finding  a  satisfactory  purchaser,  is  ready  to  close 
in  the  ordinary  course  of  liis  business.  When  a 
farmer  has  harvested  his  crop,  when  a  manufac- 


LIQUIDATION,  COMMERCIAL  AND  BANK     269 

turer  has  turned  out  his  finished  product,  or  when 
the  importer  has  transported  his  goods  to  market, 
they  all  are  ready  to  liquidate  their  commodities, 
turn  them  into  cash,  balance  profit  and  loss  ac- 
count, and  get  ready  for  another  operation.  This 
is  the  regular  course  of  business,  and  on  its  success- 
ful movement  depends  the  abihty  of  the  workers 
of  a  country  to  provide  food  and  clothing  for  those 
who  are  dependent  upon  them.  This  routine  is  as 
regular  as  the  rising  of  the  sun,  which  calls  man  to 
his  labor ;  it  is  as  unfailing  as  the  appetites  to  be 
satisfied,  and  as  continuous  as  the  flow  of  time. 

By  means  of  the  credit  system  the  operations 
of  business  are  multipHed,  and  therefore  the  profits 
and  the  well  being  and  comfort  of  a  people.  The 
argument  in  favor  of  the  establishment  of  the 
credit  system  was  well  stated  in  a  dialogue  be- 
tween a  country  gentleman  and  a  London  mer- 
chant, published  in  1683,  nine  years  before  the 
Bank  of  England  was  chartered ;  and  it  is  just  as 
convincing  now  as  then.  The  country  gentleman 
asked,  "How  does  the  bank  help  business?"  to 
which  the  merchant  rej^lies,  "  The  bank  will  lend 
manufacturers  money  on  their  stock,  so  they  can 
keep  on  manufacturing."  The  country  gentleman 
then  asks,  "  How  can  the  bank  enlarge  their 
credit  ?  "  The  merchant  answers,  "  They  may 
deposit  goods  they  cannot  sell  and  raise  new  credit 
on  them  of  at  least  three  or  four  times  the  value  of 
the  goods  they  deposit."  It  will  be  noticed  there 
was  nothing  slow  about  this  seventeenth-century 


270  FEDERAL   CLEARING  HOUSES 

merchant.  He  continues,  "  The  bank  will  increase 
exportations  and  importations.  The  importer  can 
remit  two  thirds  or  three  quarters  of  the  value  of 
the  goods  to  his  correspondent  without  staying  for 
a  market,  which  tends  to  make  England  the  em- 
porium of  Europe." 

The  definite  object  of  the  credit  system,  inau- 
gurated nine  years  after  this  dialogue  was  printed, 
was  to  increase  business  over  what  it  would  be  if 
conducted  only  by  barter  or  by  an  actual  payment 
of  cash  in  full  for  each  purchase.  The  anticipa^ 
tions  of  the  residts  coming  from  the  establishment 
of  the  Bank  of  England  were  fully  realized  in  the 
increase  of  business  and  national  prosperity. 

But  the  intervention  of  a  bank  and  the  use  of 
credit  introduced  a  danger  as  well  as  an  aid  to 
the  business  it  created.  The  theory  of  the  system 
is  that  the  borrower  will  not  be  disturbed  in  his 
business,  and  the  help  given  him  by  the  bank  will 
be  as  constant  and  firm  as  if  he  was  trading  by 
the  system  of  barter  which  was  supplanted  by  the 
new  system  of  credit.  The  merchant  has  a  right 
to  expect  that  the  new  system  shall  be  just  as  good 
as  the  old.  The  credit  provided  by  the  Bank  of 
England  was  so  strong,  and  the  capital  of  the  bank 
was  so  great,  that  for  a  century  at  least  the  mer- 
chants had  no  reason  to  complain  of  the  treatment 
they  received.  Credit  seemed  just  as  good  as 
barter,  and  the  resulting  profits  were  far  greater, 
and  the  wisdom  of  the  change  from  the  old  system 
to  the  new  was  not  questioned. 


LIQUIDATION,  COMMERCIAL  AND  BANK     271 

There  is  a  danger,  however,  kirking  in  the 
credit  system,  because  it  is  based  on  the  law  of 
averages,  and  that  law  is  liable  to  exceptional  as 
well  as  ordinary  averages.  The  bank  may  en- 
counter unusual  vicissitudes,  and  not  be  able  to 
carry  out  its  engagements,  and  then  the  reliance 
on  which  the  merchant  has  been  conductino-  his 
business  may  prove  to  be  not  well  founded.  The 
merchant  relied  on  the  bank  to  help  him  to  carry 
on  his  business  luitil  he  reached  its  natural  con- 
clusion, the  time  when  a  profitable  liquidation 
could  be  accomplished.  His  part  of  the  bargain 
was  to  pay  the  bank  for  the  use  of  its  credit,  and 
the  part  of  the  bank  was  to  keep  that  credit  as 
good  as  gold  and  as  stable  as  barter.  The  mer- 
chant represents  the  people,  and  the  bank  is  the 
other  party. 

It  is  manifestly  a  one-sided  transaction  if  the 
bank,  after  having  induced  the  merchant  to  pay  it 
for  its  credit,  abrogates  its  part  of  the  engagement 
but  holds  the  merchant  to  his.  But  this  state  of 
affairs  has  frequently  occurred  since  the  establish- 
ment of  the  credit  system.  When  it  does  occur 
the  merchant  has  to  face  another  kind  of  liquida- 
tion than  that  which  comes  in  the  ordinary  course 
of  business. 

It  is  a  forced  liquidation,  forced  upon  the  mer- 
chant by  the  bank  with  no  regard  to  his  business, 
or  whether  the  liquidation  results  in  a  profit  or  a 
loss  to  him.  The  bank  then  virtually  says  to  the 
merchant,  "  Circumstances  have  arisen,  over  which 


272  FEDERAL   CLEARING  HOUSES 

I  have  no  control,  which  prevent  me  from  carrying 
out  my  j)art  of  the  bargain  any  longer,  I  pro- 
posed to  give  you  a  substitute  for  barter  that  was 
equally  good  and  stable,  but  my  j)ro vision  to  enable 
me  to  do  so  was  calculated  only  for  ordinary  times, 
and  extraordinary  events  have  occurred  wliicli 
have  exhausted  my  ability,  and  I  am  sorry  that  I 
cannot  continue  to  make  money  out  of  you,  but 
I  am  unable  to  do  so,  and  I  must  ask  you  to  liqui- 
date your  business  to  a  sufficient  extent  to  enable 
you  to  repay  your  bank  debts."  The  merchant 
might  endeavor  to  recall  the  arguments  used  when 
the  credit  system  was  established,  but  he  is  met 
with  the  answer,  "  Ours  is  only  a  tacit  moral  obli- 
gation, while  yours  is  a  legal  and  enforceable  one, 
and  there  is  no  other  way  out  of  the  trouble  except 
a  forced  liquidation." 

This  is  no  fancy  sketch,  but  a  description  of  events 
which  have  occurred  many  times  since  the  credit 
system  began  to  be.  It  shows  the  difference  between 
commercial  and  bank  liquidation,  and  the  cause  of 
the  latter.  When  a  bank  liquidation  takes  place, 
there  are  some  who  are  ready  to  ascribe  the  trou- 
ble to  the  borrowers.  We  read  such  expressions 
as  these :  "  There  is  enough  money  to  meet  the 
legitimate  requirements  of  the  situation."  "  Small 
traders  on  light  margins  and  big  traders  who  are 
carrying  more  stocks  than  they  can  handle  are  the 
only  people  who  are  suffering  from  the  present 
high  rates  of  money."  "  Many  more  loans  will  be 
called   before   the  banks    complete    their  current 


LIQUIDATION,  COMMERCIAL  AND  BANK     273 

movement  of  loan  contraction."  "The  situation 
demands  drastic  loan  contraction."  "The  weak 
holder  is  selling  and  the  strong  holder  is  buying." 

What  sin,  it  may  be  asked,  has  the  trader  com- 
mitted in  making  his  transactions  with  the  banks, 
that  he  should  be  visited  with  punishment  as  if  he 
were  a  malefactor?  What  justice  is  there  in  a 
situation  which  sacrifices  the  weak  holder  and 
plays  into  the  hands  of  the  strong  ? 

Whatever  the  ethics  of  the  case  may  be,  it  re- 
mains true  that  the  credit  system  as  practiced  in 
our  country  and  England  exposes  the  trader  to 
another  kind  of  liquidation  than  that  which  is 
natural  and  healthy.  It  is  one  which  he  cannot 
foresee  or  guard  against,  and  it  comes  from  our 
"evil  and  misguided  system,"  as  one  \\Titer  has 
called  it,  which  occasionally  breaks  down,  at  which 
times  the  banks  cannot  fulfill  their  undertaking 
to  furnish  the  commercial  world  with  a  safe  and 
stable  system.  The  deduction  is  that  the  banks 
need  help  to  enable  them  to  fulfill  their  part  of  the 
contract  with  the  public.  Completing  the  con- 
tract, so  to  call  it,  at  the  expense  of  the  other 
party  thereto  cannot  be  accepted  as  just  or  satis- 
factory. The  credit  system  should  be  maintained 
without  loss  to  the  public.  This  can  be  done  only 
by  providing  an  adjunct  to  give  the  banks  what- 
ever assistance  they  need  to  carry  out  their  under- 
taking, without  damage  to  the  other  side.  This 
adjunct,  it  is  claimed,  must  be  a  higher  order  of 
institutions  than  the  banks,  and  the  effort  in  this 


274  FEDERAL   CLEARING  HOUSES 

book  is  to  prove  that  our  clearing  houses  can  be 
made  that  adjunct,  so  that  forced  liquidations  from 
failure  of  the  credit  system  may  cease  entirely. 

Neither  panics  nor  forced  liquidations  can  take 
place  under  a  system  of  barter,  because  exchanges 
thereunder  are  made  only  for  commodities  of  equal 
value.  Such  a  system  has  no  need  of  banking  or 
credit  laws.  The  system  which  takes  its  place 
should  have  all  of  its  merits  and  none  of  its  limi- 
tations. Otherwise  the  credit  system  may  be  stig- 
matized as  a  cheap  and  flimsy  construction  built 
on  the  shifting  sands  of  speculation,  against  wliich, 
if  the  winds  blow,  it  falls.  The  credit  system 
should  be  built  upon  a  foundation  as  solid  as  gold. 
In  countries  with  a  monarchical  form  of  govern- 
ment, the  foundation  is  a  central  government  bank. 
In  a  republic  the  required  assistance  and  strength 
can  be  had  more  safely  and  beneficently  through 
our  clearing  houses.  In  either  case  the  business 
public  is  guaranteed  that  business  transactions  may 
be  carried  through  to  their  legitimate  conclusion 
without  the  danger  of  a  bank  liquidation. 


XVIII 

THE    INELASTICITY    OF    OUK    CURRENCY 

The  trouble  caused  by  the  pressure  for  money 
now  (September,  1899)  experienced  throughout 
our  country  is  one  that  can  hardly  be  satisfactorily 
accounted  for  and  disposed  of  except  by  laying  it 
at  the  door  of  our  banking  system.  A  monetary 
disorder  can  be  traced  back  to  its  origin  as  plainly 
as  can  a  typhoid  infection.  Money  was  easy 
enough  a  few  weeks  ago  ;  now  merchants  find  that 
the  market  for  commercial  paper  is  almost  brought 
to  a  standstill.  There  is  a  general  disturbance  of 
business,  of  which  the  commotion  at  the  Stock 
Exchange  is  only  a  symptom. 

What  is  the  explanation  of  this  remarkable 
change  ? 

In  the  first  place,  it  is  evident  that  the  great 
prosperity  so  apparent  to  us  all  has  required  as  its 
natural  result  the  circulation  of  an  increased 
amount  of  money  among  the  people  for  many  uses. 
One  of  these  many  uses  is  to  pay  wages  to  the 
operatives  who  have  at  last  found  plenty  of  work 
at  home,  some  of  whom  have  made  the  bridges  and 
other  manufactured  products  we  are  sending  across 
the  ocean.     That  our  country  has  begun  to  com- 


276  FEDERAL   CLEARING  HOUSES 

pete  in  the  markets  of  the  world  is  a  true  subject 
for  congratulation.  This  free  circulation  of  an 
enlarged  amoimt  of  money  is  a  healthy  sign,  but 
it  is  necessarily  accompanied  by  a  corresponding 
decrease  of  reserves  of  currency. 

In  the  next  place,  it  is  evident  that,  notwith- 
standing this  increase  of  circulation  and  decrease 
of  reserves,  an  additional  amount  of  money  must 
be  provided  for  the  usual  fall  business,  which  in- 
cludes the  movement  of  the  crops.  The  process  of 
sending  money  out  into  the  country  to  pay  farmers 
for  their  crops  is  the  initial  business  movement  of 
the  year,  and  it  should  be  facilitated  in  every  way, 
so  that  the  farmer  shall  get  the  most  possible  for 
his  crops  and  so  that  other  industries  and  trades 
shall  not  be  disturbed  by  the  operation. 

It  is  therefore  a  source  of  national  regret  that 
when  this  further  demand  is  made  on  our  banking 
system  for  currency  for  the  fall  business  and  to 
move  the  cotton  and  other  crops,  which  is  a 
healthy,  natural,  and  temporary  demand,  we  dis- 
cover an  utter  inability  on  the  part  of  our  banks 
to  perform  this  service  without  withdrawing  their 
facilities  from  trade  centres  and  producing  a  semi- 
panic.  This  is  because  our  currency  is  fixed  in 
amount,  and  therefore  rigid  and  without  elasticity, 
and  when  an  extra  demand  is  made  there  is  no 
way  of  supplying  it  except  by  causing  forced  liqui- 
dations and  denying  accommodations  unless  at  high 
rates  of  interest,  and  otherwise  restricting  business. 

That  such  a  monetary  disturbance  could  occur 


INELASTICITY  OF  OUR   CURRENCY     211 

in  plain  view  of  so  much  prosperity  is  a  national 
humiliation.  Our  banking  system  ought  to  be 
able  to  meet  such  demands  as  we  have  had  in  the 
past  few  weeks  without  the  slightest  tremor. 

The  inelasticity  of  our  currency  is  the  chief 
defect  in  our  banking  system,  and  it  brings  un- 
measured damage  and  inflicts  a  great  injustice  on 
the  commercial  community.  The  difficulty  may 
be  explained  in  a  few  words  by  a  reference  to  the 
elementary  conditions  of  our  currency  and  banking 
system. 

The  government  first  provides  the  country  with 
coin  and  currency,  which  by  law  is  a  legal  tender 
for  the  payment  of  debts.  The  government  thus 
creates  the  money  for  the  people  to  use.  The 
government  then  enacts  a  general  banking  law, 
and  allows  the  banks  to  receive  money  on  deposit 
and  lend  75  or  85  per  cent,  of  it,  retaining  only 
25  or  15  per  cent,  of  legal  tender  money  as  a 
reserve. 

The  government  has  thus  enacted  two  contra- 
dictory laws.  This  was  not  done  to  favor  the 
banks  or  because  the  banks  controlled  legislation, 
but  because  legislators  did  not  see  any  other  way 
of  constructing  the  banking  system. 

First,  our  fundamental  law,  the  Constitution, 
has  made  only  gold  and  silver,  or  government 
money,  a  legal  tender;  and  then,  second.  Congress 
has  put  it  out  of  the  power  either  of  the  banks  or 
the  people  to  live  up  to  that  law  by  legalizing  the 
credit  system  of  banking  and  of  doing  business. 


278  FEDERAL   CLEARING  HOUSES 

The  law  making  government  coin  and  paper 
tlie  only  legal  tender  bears  harder  on  the  debtor 
class  of  the  people  than  it  does  on  the  banks,  who 
are  mere  automatic  agents  for  receiving  and  pay- 
ing money.  The  banks  by  lending  their  deposits 
—  and  they  always  endeavor  to  lend  as  near  the 
legal  limit  as  possible  —  create  the  debtor  class, 
and  they  encourage  the  business  world  to  use  their 
money  and  go  in  debt  by  offering  it  at  low  rates. 
The  law  making  coin  and  government  notes  the 
only  legal  tender  for  the  payment  of  debts  is  kept 
in  the  background  at  such  times  by  the  ease  in 
money.  It  seems  to  the  borrower  that  there  is  a 
limitless  supply  of  money  on  good  credit  or  collat- 
eral. The  point  is  overlooked  by  many  that  the 
thousands  of  millions  of  money  held  by  the  banks 
are  all  subject  to  the  contradictory  law  which  re- 
quires a  lawful  money  reserve  of  15  or  25  per 
cent.,  and  if  the  reserve  falls  below  those  percent- 
ages then  the  thousands  of  millions  of  dollars  are 
instantly  locked  up,  and  not  a  dollar  can  be  legally 
lent  until  the  reserve  rises  again  above  the  legal 
requirement.  Like  the  sailor  on  his  raft,  a  debtor 
may  well  say.  Money,  money  everywhere  and  not 
a  dollar  to  be  had,  except  at  unusual  or  oppressive 
rates  of  interest. 

Under  our  system  of  contradictory  laws,  the  one 
a  credit  law  in  favor  of  the  banks  and  the  other  a 
cash  law  to  govern  the  people,  when  the  reserve 
falls  below  the  legal  requirement  by  reason  of 
activity  in  business  or  from  any  other  cause,  there 


INELASTICITY  OF  OUR   CURRENCY     279 

must  be  a  scramble  for  money.  Banks  must  stop 
discounting,  debtors  must  liquidate,  the  price  of 
money  must  go  up,  and  the  prices  of  commodi- 
ties —  other  things  being  equal  —  must  go  down. 
The  law  properly  forbids  the  banks  to  lend  when 
reserves  are  impaired,  and  the  only  way  to  restore 
an  easy  condition  is  to  liquidate  enough  business 
to  provide  the  banks  with  the  reserve  of  legal  ten- 
der money  which  the  law  requires  them  to  hold. 
This  is  tantamount  to  laying  a  tax  on  all  busi- 
ness, in  the  shape  of  increased  interest  charges, 
and  of  paying  that  tax  to  foreign  and  domestic 
bankers,  and  of  thus  restricting  legitimate  business 
and  making  it  more  difficidt  for  our  manufacturers 
to  compete  in  the  markets  of  the  world,  and  thus 
putting  a  clog  on  the  wheels  of  prosperity. 

It  is  very  evident  that  our  money  laws  should 
not  be  conflicting  but  harmonious,  and  should  not 
restrict  and  depress  industries  but  foster  them, 
and  should  not  be  in  favor  of  one  class  but  of  the 
whole  people.  How  to  harmonize  or  adjust  them 
in  a  way  absolutely  safe  to  all  interests  is  the 
question.  It  should  always  be  safe  to  do  that 
which  is  authorized  by  law.  Now  it  is  not  safe 
for  a  merchant  to  enter  into  a  legitimate  business 
operation  depending  upon  a  continuance  of  the 
money  market  in  a  stable  condition.  The  reserve 
is  too  easily  encroached  upon,  and  the  money  mar- 
ket is  too  easily  upset. 

The  adjustment  required  by  fair  dealing  with 
the  people  is  to  provide  a  credit  currency  acces- 


280  FEDERAL   CLEARING  HOUSES 

sible  to  all  tlie  people  through  the  banks  by  means 
of  ordinary  discounts,  which  the  banks  will  be  com- 
pelled to  accept  in  payment  of  all  debts  to  them. 
Then  it  is  apparent  the  government  will  have  done 
justice  between  the  banks,  which  are  conducted  on 
the  credit  system,  and  the  people,  who  are  required 
to  conduct  their  business  on  a  cash  basis.  There 
will  not  then  be  one  law  for  the  banks  and  another 
law  for  the  people.  The  argument  is  that  if  the 
banks  are  to  be  allowed  to  conduct  business  on 
the  credit  system  a  way  should  be  provided  by 
which  the  people  also  shall  have  the  benefit  of  the 
same  system. 

But  as  it  is  the  function  of  banks  only  to  use 
money  and  not  to  create  it,  if  a  credit  currency  of 
universal  acceptability  is  to  be  created  to  be  used 
by  the  people  in  paying  their  debts  to  the  banks, 
then  the  government  must  provide  for  such  a  cur- 
rency through  corporations  specially  authorized  to 
issue  it. 

The  contention  of  many  of  our  best  authorities 
on  finance  is  that  our  clearing  houses  are  the 
proper  bodies,  when  incorporated  under  a  federal 
law,  to  perform  this  service. 

When  once  Congress  has  provided  for  a  credit 
currency  to  be  used  in  payment  of  debts  to  banks, 
which  may  be  issued  in  case  of  emergency,  then 
the  pressure  would  be  taken  off  the  people,  then 
the  clog:  would  be  removed  from  active  business, 
then  justice  would  be  done  to  the  conmaercial 
world,  which  has  suffered  so  long  and  so  much 
under  our  present  "•  evil  and  misguided  system." 


INELASTICITY  OF  OUR   CURRENCY     281 

If  during  the  past  two  months  of  August  and 
September,  1899,  the  clearing  houses  of  New  Or- 
leans, Chicago,  St.  Louis,  St.  Paul,  Minneapolis, 
Milwaukee,  Detroit,  and  other  large  financial 
centres  from  which  the  demand  for  currency 
has  come  had  been  able  to  issue  a  clearing-house 
currency  secured  by  banking  assets  for  fall  use  in 
moving  our  abundant  harvests,  the  present  flurry 
in  money  and  consequent  disturbance  in  business 
throughout  the  country  would  have  been  avoided. 

Until  our  banking  laws  have  been  made  to  bene- 
fit and  protect  equally  the  banks  and  the  business 
community,  the  prejudice  against  banks  wiU  exist 
and  the  agitation  by  misguided  inflationists  for 
more  issues  of  money  by  the  government  will  con- 
tinue. 

This  is  the  only  aspect  of  the  banking  question 
in  which  the  people  are  interested.  It  is  a  mea- 
sure which  any  politician  can  advocate  on  the 
stump  before  his  constituents,  whether  they  are 
traders  or  farmers,  and  to  which  any  newspaper 
seeking  to  uphold  and  protect  the  interests  of  the 
people  can  freely  give  its  support. 

This  is  a  non-partisan  question,  and  sound- 
money  Democrats  can  unite  with  sound-money 
Republicans  in  an  effort  to  place  our  banking  sys- 
tem on  a  stable  basis  by  means  of  a  safe  and  yet 
elastic  credit  currency. 


INDEX 


Accommodation,  an  enlarged,  needed, 

182. 
Alabama,     Kansas,     and    Nebraska, 
clearing  house  currency  safe  in, 
223. 
America,  limitations  put  on  banks  in, 

140. 
Anthropological  Society,  the,  of  Yon- 

kers,  1G3. 
Appleton,  Nathan,  on  the  relations  of 
the  banks  to  the  community,  88, 
123. 
on  contraction  and  expansion,  201. 
on  nominal  prosperity,  205. 
Apprehension,  effects  of,  69. 
Apprehension  minimum,  the,  249. 
Ashburton,  Lord,  on  the  panic  of  1829, 

184. 
Asset  currency,  a  lien  on  estates,  150, 

151. 
Assets,    banking    upon,    dangers  of, 
149. 
issuing  currency  based  upon,  123. 
of  banks  must  be  "  quick,"  158. 
banking  on,  dangerous,  GO. 
the,  offered  as  security,  93,  94. 
bank,  as  security  for  issues,  10. 
the  only  true  basis  for  bank  note 
circulation,  150. 

Bank  act,  tlie  national,  should  stand 

without  amendment,  59. 
Bank,  a  governmental,  4. 
Bank  balances  the   reserves   of   the 

country,  67. 
Bank   and  merchant,  obligations  be- 
tween, 272. 
Bank  failures  make  no  difference  in 
the  value  of  clearing  house  bills, 
102. 
Bank  of  England,   decrease  of  influ- 
ence of,  10,  11. 
dwarfed  when  commercial  progress 

increased,  171. 
increased  business,  270. 
the  greatest  in  the  world,  170. 
and  other  banks,  138,  140. 
Bank  of  France,  functions  of,  109. 
Banknote  currency,  danger  of,  8. 


Bank    usurpation    not    tolerated    in 

America,  243. 
"  Bankers'  Magazine,"  262. 
Banks  doing  the  best  they  can  for 
customers,  209. 
made  for  borrowers,  said  Webster, 

52,  242. 
not  to  be    blamed  for    consulting 

their  interests,  202,  205. 
province  of,  in  the  matter  of  cur- 
rency, 57. 
the,  put  the  whole  burden  on  the 

community  in  1898,  198. 
relief  for,  207. 

should  all  have  rights  in  the  clear- 
ing houses,  263. 
should  maintain  credit,  65. 
strong  position  of,  under  a  clearing 

house  system,  225. 
vs.  the  public,  202,  203. 
work  for  their  own  interest,  89. 
Banking  assets  held  by  a  trustee,  15. 
Banking,  the  competitive  system  of, 
49,  76. 
the  cooperative  system  of,  50,  76, 

123. 
difficulties  in  the  subject,  2. 
Banking  law,  the  first  general,  5. 
the  national,   demands    a    change, 
194. 
Banking  laws,  the,  of  the  U.  S.  reor- 
ganized after  the  Revolution,  86. 
Banking  on  assets  dangerous,  69. 
Banking  should  be   under  a  general 

law,  90. 
Banking  system,  a  problem  unsolved, 
2. 
of  the  U.  S.  should  agree  with  the 
principles  of  the  Declaration  of 
Independence,  234. 
the  present  characterized,  200. 
Banking    systems    in    America    and 
Europe  compared,  231. 
of  Anglo-Saxon  and  Latin  peoples, 
227. 
Banking,  two   systems  of,  paper  by 

Theodore  Gilman,  48. 
Baring  crisis,  the,  of  1890,  gravity  of, 
7,125. 


284 


INDEX 


Bai'ing,  Sir  Francis,  writes  an  impor- 
tant book,  17'J. 
on    commercial    exchequer    bills, 
17G. 

Bartholdt,  Hon.  Richard,  introduces  a 
currency  bill,  18,  22, 

Barter,  system  of,  270. 

Beach,  Sir  Michael.  See  Hicks-Beach. 

Bill,  the  proposed,  features  of,  52. 
operation  of,  82. 
provisions  of,  222. 
would  maintain  commercial  credit, 
199. 

Bills,  two  banking,  77. 

Blacker,  William,   on  a  mixed   cur- 
rency, 180. 

Blacklock,  John  H.,  on  the  clearing 
house,  262. 

Borrowers,  estates  of,  used  by  banks 
as  resources,  152. 

Borrowers  at  the  mercv  of  the  banks, 
151. 

Branch  banking,  258,  260. 
un-American,  159. 

Brindley,  James,  father  of  England's 
commercial  greatness,  170. 

Bullion  Committee,  the,  of  1810,  Re- 
port of,  182,  251. 

Business,  awakening  of,  in  England, 
171. 

Business  competition  helps  a  man  to 
get  cash  for  good  currency,  101. 

Business,  decrease  of,  at  time  of  war 
with  Spain,  197. 

Business,  persons  engaged  in,  77. 

Cash    basis    in    business   almost  un- 
known, 65. 
Cash  and  credit  discussed  by  Goschen, 

131. 
Cash  system  for  borrowers  a  credit 

system  for  banks,  208. 
Centralization  in  the  United  States, 

258. 
to  be  avoided,  19. 
Century,  a,  a  brief  time  for  the  survey 

of  principles,  167. 
Certificates,   the,   of  the  New  York 

clearing  house,  240. 
Certificates,  clearing-house,  suggested 

clearing-house  currency,  72. 
Certificates  and  currency  compared, 

218. 
Charters,   special,   abandoned  in  the 

United  States,  5. 
Check  system,  the,  introduction  of, 

166. 
Checks  not  illegal,  though  not  taken 

cognizance  of  by  law,  164. 
Chevalier,  Michel,  quoted,  248. 
Circulation  in  the  country  demanded, 

258,  259. 
Clearing  house,  the,  its  methods,  etc., 

262. 
definition  of,  37. 
democratic,  241. 


the,  of  London,  as  a  possible  trus- 
tee, 15. 
associations,  how  constituted,  106. 
membership  in,  free,  263. 
representative  in  character,  262. 
takes  place  of  the  government  bank, 

267. 
would  prevent  bank  crises,  206. 
Clearing-house    certificates   an   inno- 
cent infraction  of  law,  72. 
issued  in  1893,  214. 
like  the  exchequer  bills  of  1793, 175, 
188. 
Clearing-house    currency    explained, 
218. 
good  from  Maine  to  Alaska,  71. 
guarantees  for,  36. 
limits  of,  34. 
redemption  of,  80. 
Clearing  -  house  methods    should   be 

legalized,  217. 
Clearing  houses,  act  to  incorporate, 
19. 
the  American  system  of,  16. 
charters  for,  6. 

federal,  complete  the  national  bank- 
ing system,  60. 
incorporation  of,  would  be  a  help, 

70,  193,  202. 
further    from   the    business    com- 
mmaity  than  commercial  banks, 
50. 
of  issue,  19,  20,  30,  75,  193, 202,  217, 

253,  259. 
require  no  capital,  79. 
safe  trustees  for  issues  of  currency, 

158. 
when    incorporated    complete    the 
national  banking  system,  60. 
Coin  and  other  sorts  of  money  com- 
pared, 164. 
Collateral  a  lien  on  estates,  150,  151. 
Commerce  protected   by  the  bill  in- 
corporating clearing  houses,  20. 
to  be  regulated  by  Congress,  255. 
Commercial  and  monetary  panics  dis- 
tinguished, 184. 
"  Commercial  Advertiser,"  231. 
Committee's  banking  bill,  237. 
Competitive  system,  a,  204. 
Comptroller    of  the    currency  must 
make  an  annual  report  on  incor- 
porated clearing  houses,  44. 
Confidence,  failure  of,  153. 

lack  of,  brings  on  failures,  173. 
Congress,  patriotism  of,  198. 
powers  of,  as  mentioned  by  Webster, 
254. 
Constitution  of  the  U.  So,  254,  255, 

256. 
Contraction  in  a  crisis  at  the  expense 

of  borrowers,  152,  153,  173. 
Contraction    follows  want    of  confi- 
dence, 173. 
narms  the  public,  not  the  banks, 
55. 


INDEX 


285 


Cotton,  method  of  dealing  in,  127.        1 
Country  banks  in  France  demand  pro- 
tection from  Parisian  banlis,  260. 
Credit,  commercial,  defined,  62. 
destruction  in  the  political  elements 
of,  115. 
Credit  currency  issue  a  help  toward 
stability,  1^3. 
for  domestic  use,  13. 
a  sound,  protects  the  country,  68. 
Credit  of  England  saved  by  the  Bank 

of  England,  129. 
Credit  and  cash  discussed  by  Goschen, 

131. 
Credit,  commercial,  sustained  by  the 

cooperative  system,  51. 
Credit  law,  a,  for  the  banks,  cash  law 

for  the  people,  278. 
Credit  maintained  by  cash  reserves,G3. 
is  money  in  posse,  1G3. 
the  support  of,  61. 
Webster  on,  59. 
the  theory  of,  by  McLeod,  217. 
Credit  system,  the,  of  banking,  dan- 
gers of,  15. 
the,  exploited  thoroughly  in  time  of 

WilUamllL,  168. 
for  banks,  a  cash  system  for  bor- 
rowers, 208. 
should  not  involve  loss  to  the  pub- 
lic, 273. 
the,  two  hundred  years  old,  243. 
the,  multiplies  operation  and  profits, 

2G9. 
the,  requires  an  adjunct,  9. 
the,   requires  the   organization    of 

popular  banks,  232. 
theory  and  practice  of,  270,  271. 
the  universal,  61. 
what  is  it  ?  161,  165. 
Credit    Lyonnais,    one   of    the   large 
Frencli  banks,  108,  225,  226,  227. 
Crisis,  a  bank,  invited  by  present  sys- 
tem, 204. 
Currency  defined,  248. 
to  be  acceptable  must  be  solid,  249. 
clearing  house,  how  prepared,  35. 
colonial,  in  America,  169. 
comparison  of  two  kinds,  160. 
an  elastic,  defined,  212. 
fiduciary  issue  of,  10. 
a  good,  will  aid  the  country,  58. 
improvements     suggested    in,    by 

Goschen,  142. 
invigorated  at  the  expense  of  indus- 
try, 88.  205. 
issued  directly   against    assets,   in 
two  ways,  122. 
^Issue   of,  taken  from  the  Bank  of 
England  by  Peel's  bill,  157. 
issue  of,  in  Germany,  155. 
issue  limited  to  one  bank  in  France, 

1.54. 
local  issues  of,  2.59. 
made  good  "out  of  your  estate," 
153. 


present  inelasticity  of,  275,  277. 
at  present  has  small  elasticity,  216. 
problem,  13. 

provision  for  a  clearing  house,  266. 
should  be  well  distributed,  259. 
imder  tremendous  pressure,  215. 

Danger  to  interior  banks  from  clear- 
ing-house certificates,  220. 

Dangers  of  expelling  gold  by  issuing 
paper  money,  145. 

Dangers  of  the  present  banking  sys- 
tem, 67. 

Debtor  class,  the,  diflBculties  of,  278. 

Declaration  of  Independence,  2,  234. 

Dependence,  of  all  parts  of  business 
mutual,  64. 

Deposits,  in  England,  135. 

Deposits,  withdrawal  of,  effect  of, 
111. 

Discounts  of  the  Bank  of  France,  119. 

Dunbar,  C.  F.,  on  the  Imperial  Bank 
of  Germany,  4,  5. 

Elastic  currency  defined,  212. 
Elasticity  formulated,  215. 
Emergencies,  use  of  paper  money  in, 

89. 
England,  dangers  of  the  banking  sys- 
tem of,  138. 
in   danger  from  a  small  stock  of 

gold,  133,  1^4. 
Bank  of,  errors  of,  157. 
the  Bank  of,  holds  the  reserves  for 

the  English  nation,  185. 
Bank  of,  incorporated,  153. 
Bank  of,  in  the  Baring  crisis,  126. 
small  reserves  of,  184,  185. 
Bank  of,  statements  of,  117. 
reserves  of  the  banks  of,  118. 
banking  system  of,  not  a  model,  13. 
liabilities  of  banks  of,  136. 
England  and  the  U.  S.,  banking  sys- 
tems in,  7. 
England's  modern  commercial  great- 
ness, 170. 
European    system,    the,    of    govern- 
mental banks,  232. 
Exchequer  bills,  character  of,  178. 

planned  by  Montague,  167. 
Exchequer,    Webster's    plan   for  an, 
251. 
never  tried,  179. 
Expansion  and  contraction  alternate, 

199. 
Expansion  of  currency  in  France  and 
Germany,  14. 

Fairchild,  Hon.  B.  S.,  introduces  a 
bill,  18,  211. 

Fallacy,  what  is  a,  149. 

Farmers,  notes  of,  a  basis  for  bank 
currency,  259. 

Federal  clearing  house  a  safe  coun- 
terpart of  a  governmental  bank, 
241. 


286 


INDEX 


Fiduciary  issue  of  currency,  10. 
Fiduciary  issues,  meauing  of,  143. 
Fluctuations,  violent,  to  be  avoided, 

148. 
France,  Bank  of,  character  of,  4. 
functions  of,  109. 
opposed  to  English  ideas,  121. 
under  diflSculties,  116. 
entirely  free,  84,  187. 
centralization  of  banking  in,  2G0. 
issues  of  currency  in,  155,  187. 
remarkable  strength  of,  118,  187. 
reserves  in,  75,  225. 
statement  of  the  accounts  of,  114, 
115. 
France  and  Germany,  banks  of,  not 
to  be  followed  in  America,  154. 
bank  currency  on  bank  assets,  238. 
currency  for  domestic  use,  13. 
immune  fr6m  panics,  210,  252. 
France  and  Russia  able  to  lend  gold 

to  England,  128,  145,  146. 
Functions  of    incorporated    clearing 
houses  limited,  50. 

General  banking  law,  the,  of  Amer- 
ica, 16,  20. 
German  banks  amply  protected,  85, 

186. 
German  banking  system,  6. 
Germany,  reserves  in,  75,  188. 
Germany  and  France,  immune  from 
panics,  210. 
systems  of,  13. 
Gide,  Charles,  on  the  American  sys- 
tem, 3. 
on  Bank  of  France,  4. 
Gilman,    Theodore,   examined    by    a 

committee  of  the  House,  22,  46. 
Gold  basis  established  by  the  Consti- 
tution, 254. 
Gold  borrowed  by  the  Bank  of  Eng- 
land   from    France   and  Russia, 
128. 
called  back  from  Europe   in  1898, 

190. 
importation  of,  196. 
liabilities  to  be  met  in,  132,  133. 
Goschen,  George  Joachim,  speech  at 
the  Leeds  dinner,  7,  124. 
speech  asked  for,  121. 
Government,  the  American,  by  con- 
sent of  the  governed,  1. 
coins  money,  banks  use  it,  161. 
finances    should    be    independent, 

56. 
should  incorporate  clearing  houses, 

265. 
should  not  interfere  with  the  com- 
mercial business  of  the  people, 
53. 
Governmental  banks  familiar  in  Eu- 
rope, 231,  233. 
Governmental  monopoly  not  permit- 
ted   in    America    and    England, 
227. 


Hicks-Beach,    Sir   Michael,    on    re- 
serves, 12,  14,  15. 
Hoarding  cash,  effects  of,  112. 
in  France,  120. 

in  England  a  century  ago,  172. 
Hooper,  Samuel,  of  Boston,  quoted, 
87. 
on  variance  between  banks  and  cus- 
tomers, 159. 
on  currency  and  money,  205. 
Hopkinson,   S.  F.,  quotes  Goschen's 
speech,  122. 

Independence,  declaration  of,  2. 
Indianapolis  convention,  149,  150. 

bill,  the,  159. 
Inelasticity  of  currency,  275. 
Inspection  by  government  in  America, 

16. 
Interest,  lowering  rate  of,  effects  of, 

144. 
rates  of,  in  France  and  Germany, 

199. 
Interior  banks,  effect  of  withdrawals 

by,  113. 
Issue,  a  source  of,  needed  to  sustain 

solvent  houses,  228. 

Jackson,    President    Andrew,    over- 
threw the  Bank  of  the  United 
States,  86. 
vetoed  the  bank  charter  of   1832, 
234. 

Kansas,  Alabama,  and  Nebraska, 
clearing-house  currency  safe  in, 
223. 

Land  Bank,  discourse  on  a,  180. 
Law's  Mississippi  scheme,  108. 
Laws,  abstract,  relied  upon,  165. 
Leeds  proposals,  the,  7,  124. 
Liquidation,  commercial    and    bank, 
208. 
definition  of,  268. 
Liquidations    during    the    war    with 

Spain,  197. 
Liquidation,  forced,  271. 

how  accomplished  safely,  210,  274. 
Liquidation  forced  on  the  community 

in  1803,  214. 
Liquidations,  forced,  dangers  of,  192. 
Liquidation,  if  forced,  disastrous,  207. 
results  of  forced,  80. 
how  accomplished  safely,  210. 
in  1837,  losses  caused  by,  160. 
necessary  in  times  of  panic  under 

the  competitive  system,  49. 
often  commercial  death,  71.  « 

London,  banking  centre  of  the   uni- 
verse, 126. 
London  Times  quoted,  9,  124. 
Losses    from     banking     on    business 
assets,  152. 
from    currency    issued    on   assets, 
154. 


INDEX 


287 


Losses,  none  ever  came  from  clearing- 
house certificates,  92. 

McCulloch,  J.  R.,  of  London,  on  the 
panic  of  1837,  47. 
tracts  of,  181. 
McLeod,    Professor,  on  a  source  of 
issue,  217,  228. 
on  English  panics,  251. 
Marcy,   Governor,    opinion  of    unse- 
cured notes,  55. 
Mixed  currency,  by  William  Blacker, 

180. 
Mollien,  Count,  on  perpetual  readiness 

to  close  up,  229,  237. 
Monetary  and  commercial  panics  dis- 
tinguished, 184. 
Money,  forms  of,  163. 
never  lost  by  clearing  house  certifi- 
cates, 21(3. 
what  is  it  ?  163. 
Monopoly,  a,  not  permissible,  187. 
or  liberty  in  banking,  3. 
vs.  competition,  4. 
Montague,  minister  of  William  III., 
devises  a  support   to  the   credit 
system,  167,  180,  188. 
Murray,  J.  Laurie,  on  the  panic  of 
1847,  185. 

Napoleon  I.  quoted,  237. 

Nation,  the,  universally  interested  in 

sustaining  credit,  66. 
National  bank  act,  the,  17. 
high  character  of,  60. 
the,  how  it  originated,  18. 
in  accordance  with  tlie  declaration 
of  independence,  235. 
National  banking  system,  the  comple- 
tion of,  60. 
National  banks,   limitations   put  on, 

140. 
National    clearing  houses,   corporate 
powers  of,  25. 
directors  of,  27. 

guarantee  of  notes  by  every  mem- 
ber, 33. 
how  organized,  29. 
incidental  powers  of,  26. 
loan  committee  of,  27. 
may  act  as  trustees,  26. 
members  of,  24. 
powers  of,  31. 
state  districts  for,  30, 
term  of  life  of  the,  25. 
the  incorporation  of,  23. 
Nebraska,  Kansas,  and  Alabama,  clear- 
ing-house currency  safe  in,  223. 
Need,  the  great,  of  the  day,  61. 
New  York,  banking  system  in,  91. 

general  banking  law  of,  5,  87. 
New  York  Clearing  House,  reserves 
diminished  by  trust  companies, 

"New   York    Tribune,"    mentioned, 
212,  218. 


"New  York  Evening  Post,"  men- 
tioned, 203. 

"  New  York  World,"  mentioned,  x. 

Non-partisan  question,  281. 

Norton,  Edward,  proposes  a  council 
of  finance,  181. 

Note  issue,  a  privilege  not  to  be  given 
to  banks  indiscriminately,  242. 

Notes  issued  under  the  proposed  bill 
to  be  at  par  everywhere,  100,  101. 

Panic,  the  Baring,  of  1890,  7. 
and    confidence,     alternations    of, 

245. 
danger  from  a,  in  1898,  192. 
the,  of  1793,  in  England,  171,  172. 
tlie,  of  1793,  lessons  of,  183. 
the,  of  1793,  calmed  by  issues  of  ex- 
chequer bills,  250,  251. 
the,  of  1837,  47. 
the,  of  1837,  caused  by  banking  on 

bank  assets,  159. 
the,  of  1873,  remarks  of  Tilden  in 

connection  with,  220. 
the,  of  1884,  cause  of,  74. 
the,  of  1893,  212. 

the  natural  result   of  competitive 
banking,  49. 
Panic  system,  the,  51. 
the,  defined,  56. 
tlie,  a  name  approved,  183. 
Panic,  the  A'enezuela,  201. 

what  withdrawal  of  deposits  would 
cause  one,  112. 
Panics,  avoidance  of,  148. 
beginning  of,  153. 

can  be  avoided,    as    foreign   expe- 
rience sliows,  252. 
a  century  of,  163. 

the  fourteen  between  1793  and  1893 
lead  to  the  same  deductions,  185. 
how  calmed,  2.50. 
how  caused,  73. 
how  prevented,  210. 
monetary  and  commercial    distin- 
guished, 184. 
position  of  banks  in,  88. 
prevented    by    clearing-house  cur- 
rency, 221. 
recurrence  of,  3. 
remedy  for,  74. 

result  from  defective  system,  78. 
upset  the  credit  system,  06. 
Paper  to  be  properly  secured,  ID. 

expels  gold,  8,  144. 
Paper  money,  use  of,  89. 
substitution  of,  for  gold,  effect  of, 
143. 
Parliamentary   commission   of    1857, 

185. 
Parliamentary  plan  of  relief  (1793), 

15,  175,  182,  188. 
Parsons,  Charles,  letter  of,  47. 
Patriotism,   the,   of  the  banks,  245, 

246. 
Peel,  Sir  Robert,  letter  to,  181. 


288 


INDEX 


Present  banking  system  precarious, 
G7. 

Preventive  nature  of  clearing-house 
currency,  73. 

Problem,  the  banking,  1. 

Property,  losses   of,  owing  to  defec- 
tive bank  system,  207. 

Prosperity,  nominal,  under  expansion, 
201. 

Public,  benefits  to  the,  from  the  co- 
operative system  of  banking,  51. 
a  reservoir  to  make  good  impaired 
bank  reserves,  204. 

Publication  of  accounts,  importance 
of,  142. 

"  Quarterly  Review,"  quoted,  186. 

Redemption  of  bank  notes  under  the 
proposed  bill,  103,  105,  107. 

of  clearing-house  currency,  80,  85. 
Republican  idea,  the,  in  banking,  5. 

principles  to   be    followed    in  our 
banking  system,  234,  235. 
Reserve,    diminution     of,   creates    a 
panic,  108. 

an  effectual,  the  need  of  the  pre- 
sent, 114. 

needed  in  a  crisis,  132. 

notes,  53. 

the  safe,  1G5. 

a  safe,  for  a  bank,  108. 

a    second,   of    gold,   suggested    by 
Goschen,  145,  147. 
Reserves,  ample,  required,  75. 

decrease  of,  27G. 

discussion  of,  in  England,  12. 

too  easily  encroached  upon,  279. 

in  different  parts  of  the  country, 
110. 

of  the  English  banks,  118. 

in  N.  Y.  in  1808,  190. 

of  the  banks  out  on  call,  67. 

the  cash,  of  England,  inadequate, 
135,  136,  137,  186. 

importance    of    the   upholding   of, 
141. 

of  national  banks  inadequate,  110. 

the  small,  of  the  N.  Y.  Trust  Com- 
panies, 12. 

small  margin  of,  208. 

small,  under  the  present  act,  73. 

"  supplementary,"  9. 

sustain  credit,  63. 
Ricardo,    David,    on    the    power    to 
issue,  IGl. 

on  security  against  panics,  187. 
Rives,  senator,  on  Webster's  plan  for 

an  exchequer,  161. 
Russia  and  France  lend  gold  to  Eng- 
land, 129,  146. 

Secretary  of  the  Treasury,  duty  of, 

256. 
Security  for   notes    held   by  banks, 

result  of,  90. 


Securities,  sales  of,  to  pay  notes,  96. 
sundry,   offered    to    sustain    bank 
issues,  91. 

Slirinkage  in  the  panic  of  1893,  213. 

Silver  scare,  the,  causes  a  panic,  74, 
78. 

Sinclair,  Sir  John,  plan  of  relief  of, 
174. 
quoted,  174. 

Solvency  defined,  62. 

Sound  money,  218. 

South,  banking  in  the,  91. 

South  Sea  Bubble,  168. 

Spain,  war  with,  its  financial  lesson, 
189,  195. 

Speculation  follows  lowering  rate  of 
interest,  144. 

Stability,  financial,  demanded,  3. 
not  expansion,  the  object  of  clear- 
ing-house currency,  229. 

States  to  control  their  owti  finances, 
261. 

Suffolk    system,  the,   in    New  Eng- 
land, 95,  122. 

Sumner,  Professor,   of  Yale  Univer- 
sity, on  the  Bullion  Report,  183. 
on  the  needed  security,  68. 
on  solid  currency,  251. 

Sun,  the  N.  Y.,  on  panics,  246. 

Supplementary  reserves,  9. 

Tilden,  SamuelJ.,  on  clearing-house 

certificates,  219. 
Treasury,  the,  of  the  U.  S.  from  the 

banking  operations  of  the  people, 

57. 
Trust  companies,  small  reserves   of, 

11. 
Trustee,   the  clearing-houses  consti- 
tute a,  95. 
a,  necessary  in  issuing  currency  on 

assets,  157. 
Trusteed    currency    compared    with 

other  kinds,  IGO,  162. 
Trustees    under    the    proposed    bill, 

92. 
Trusteeship  inspires  confidence,  177. 
necessary  in  issuing    notes    based 

upon  assets,  123. 
Truth    the    foundation    of  fallacies, 

150. 

United  States,  Bank  of  the,  86. 

number  of  banks  in,  112. 
Unsecured  notes,  Marcy's  opinion  of, 

55. 
Usurpation  not  tolerated  in  America, 

243. 

Venezuela  message  causes  a  panic, 
201. 

"Wade,  John,    advocates    a    national 

board  of  circulation,  181. 
Weakness  of  present  system  revealed, 

74. 


INDEX 


289 


Webster,  Daniel,  plan  for  an  exche- 
quer, 161,  178,  179,  251. 
on  credit,  59. 

on  the  function  of  banks,  242. 
on  the  Constitution  of  the  U.  S.,  254, 
255. 
Weguelin,  T.  M.,  comments  on  small 
cash  reserves,  11. 


West,  the,    clearing-house  currency 

safe  in,  221. 
Western  and  Southern  States,  banking 

in,  223,  224. 
Wheateny,    John,   on  the    panic    of 

1793,  176. 
Willson,    H.     Bowlby,     advocates    a 

currency  board,  181. 


ELECTROTYPED  AND  PRINTED 
BY   H.   O.    HOUGHTON   AND   CO. 

CAMBRIDGE,  MASS.,  U.  S.  A. 


A  GRADED  BANKING 
SYSTEM 

AND 

FEDERAL  CLEARING  HOUSES 

By 

THEODORE  OILMAN 

Each  t6mo,  $J-00 

THE  BANKING  LAW  JOURNAL,  N.  Y.,  says:  "We 
think  Mr.  Theodore  Oilman's  book  upon  •  A  Graded  Bank- 
ing System '  affords  a  solution  of  the  problem." 

THE  NORTHWESTERN  BANKER,  DES  MOINES, 
IOWA,  says  :  "The  plan  as  proposed  by  Mr.  Oilman  is  the 
best  yet  brought  forward  for  the  prevention  of  panics." 

THE  NEW  YORK  FINANCIER  says:  "  Why  should  Con- 
gress  refuse  to  pass  a  bill  incorporating  clearing-houses  and 
grant  them  power  to  issue  credit  currency  on  good  collateral  ? 
There  is  now  pending  in  Congress  a  bill  embodying  these 
suggestions,  and  Mr.  Theodore  Oilman,  who,  we  believe, 
had  a  great  deal  to  do  with  its  preparation,  has  lately  pointed 
out  wherein  it  meets  the  situation.  Congress  can  hardly 
object  to  its  provisions." 

THE  NATION  says  of  the  purpose  of  this  book,  that  it  is  a 
"  proposal  to  improve  our  banking  system  by  legalizing  and 
regulating  the  functions  that  have  been  assumed  by  clearing- 
houses in  times  of  financial  alarm,"  ..."  that  there  should 
be  a  clearing-house  incorporated  in  every  State  by  a  national 
law,  which  should  issue  currency  to  banks  on  pledge  of  their 
assets  as  collateral." 

JOSEPH  FRENCH  JOHNSON,  Professor  of  Finance  and 
Economy  in  the  University  of  Pennsylvania,  writes  of  Mr. 
Oilman's  book  in  the  Aiinals  of  the  American  Academy  for 
September,  1898. 

Frot7i  Professor  Johnson'' s  Review. 

The  author  of  "  A  Graded  Banking  System  "  is  a  New  York 
banker,  who  is  alive  to  the  defects  of  the  present  national  bank- 
ing system.  His  book  is  an  effort  to  show  how  a  bank-note 
may  be  provided  which  shall  be  safe  and  as  acceptable  as  the 
present  national  bank-note,  and  which  shall  at  the  same  time  be 
issued  promptly  and  in  sufficient  volume  whenever  the  needs  of 
trade  require. 


The  first  six  chapters  of  Mr.  Oilman's  book  contain  general 
observations  upon  the  theory  and  practice  of  banking,  and  a 
comparison  of  the  United  States  system  with  the  English,  French, 
and  German  systems.  The  author  then  considers  several  reme- 
dies which  have  been  proposed  for  the  improvement  of  the 
United  States  system.  The  proposal  to  retire  the  greenbacks 
he  considers  unwise  and  useless.  He  accepts  the  Republican 
doctrine  that  the  greenback  can  do  no  harm  so  long  as  a  protec- 
tive tariff  is  relied  upon  to  furnish  adequate  revenue. 

Mr.  Oilman  has  a  pretty  clear  idea  of  the  service  which  a  bank- 
note performs,  and  his  book,  so  far  as  it  relates  to  this  subject,  is 
valuable.  He  advocates  the  incorporation  of  State  clearing 
houses,  each  clearing  house  to  have  the  power  to  issue  demand 
notes,  and  to  loan  them  to  any  bank  within  the  State,  the  borrow- 
ing bank  to  deposit  current  assets  as  security.  The  circulating 
notes  issued  to  a  bank  shall  not  exceed  75  per  cent,  of  the  esti- 
mated value  of  the  assets  deposited.  These  notes  shall  be  of 
any  denomination  desired,  of  one  dollar  or  one  thousand  dollars, 
and  shall  be  receivable  at  par  at  all  the  national  banks  in  the 
country. 

Mr.  Oilman  is  an  energetic  worker  for  his  plan.  He  has  put 
it  into  the  form  of  a  bill,  and  appeared  before  the  House  Com- 
mittee on  Banking  and  Currency  in  advocacy  of  it.i  In  this  bill 
a  clearing-house  association  is  authorized  in  any  city  of  not  less 
than  six  thousand  inhabitants  ;  but  the  privilege  of  issuing  circu- 
lating notes  is  restricted  to  clearing  houses  which  effect  clearmgs 
of  over  two  hundred  millions  of  dollars  annually,  or  to  the  chief 
commercial  city  in  each  State ;  and  if  there  are  in  any  State  two 
or  more  clearing  houses  having  the  right  of  issue,  then  the  Comp- 
troller of  the  Currency  shall  divide  the  State  into  clearing  house 
districts,  and  banks  in  each  State  or  district  shall  do  business 
only  with  the  clearing  house  of  issue  in  their  State  or  district. 
The  circulating  notes  shall  be  redeemed  on  demand  by  the  clear- 
ing house  of  issue,  and  also  by  the  bank  through  which  they 
were  first  paid  out.  The  notes  are  to  be  furnished  by  the 
national  government,  and  the  Comptroller  of  the  Currency  is  to 
exercise  supervision  over  the  affairs  of  all  clearing  houses  as  well 
as  of  banks. 

Mr.  Oilman's  plan  deserves  attention.  In  some  respects  it  is 
far  superior  to  the  plan  advocated  by  the  Monetary  Commis- 
sion, or  to  the  plan  reported  by  the  House  Committee.  Both 
these  measures  provide  for  the  independent  issue  of  circulating 
notes  by  some  four  thousand  isolated  banks  under  conditions 
which  will  furnish  strong  inducements  to  each  bank  to  keep  afloat 
the  largest  possible  quantity  of  its  notes.  They  make  those  notes 
receivable  at  par  by  all  banks  and  by  the  government,  aiming 
thus  to  secure  for  them  the  widest  possible  circulation.  Mr.  Gil- 
man  would  secure  wide  currency  for  his  notes  by  compelling  their 
acceptance  by  banks,  but  he  restricts  the  right  of  issue  to  forty 
or  fifty  institutions,  and  this  is  a  very  important  matter.  It  is 
easy  enough  to  devise  a  scheme  which  shall  result  in  the  abun- 
dant issue  of  bank-notes,  but  it  is  quite  another  matter  to  provide 
1  Bill  H.  R.  9279,  55th  Congress,  2d  session.  _ 


that  the  issue  shall  be  restricted  whenever  the  occasion  demands. 

Undue  expansion  of  the  currency  volume  is  an  evil  which  framers 
of  bank-note  systems  must  always  have  in  mind,  for  bank-notes 
may  drive  gold  from  the  country,  and  so  embarrass  the  United 
States  Treasury  quite  as  effectively  as  greenbacks,  silver  dollars, 
or  Sherman  notes.  Under  Mr.  Oilman's  plan,  the  issue  of  notes 
would  be  in  the  hands  of  comparatively  few  men,  and  it  is  fair 
to  assume  that  they  would  be  financiers  capable  of  understanding 
the  far-reaching  influences  of  all  their  operations.  At  a  time 
when  gold  was  being  withdrawn  from  the  United  States  Treasury 
for  export,  it  would  be  reasonable  to  expect  that  these  men  would 
perceive  the  necessity  for  a  restriction  of  bank-note  issues,  and 
would  refuse  applications  of  banks  for  further  loans.  In  this 
respect,  therefore,  Mr.  Oilman's  plan  is  decidedly  better  than 
any  plan  which  leaves  the  issue  of  bank-notes  entirely  at  the  dis- 
cretion of  several  thousand  men  scattered  all  over  the  country. 

Mr.  Oilman's  plan  must  be  regarded  as  encouraging  evidence 
that  practical  men  of  affairs  are  beginning  to  understand  not  only 
the  necessity  for  a  revision  of  the  banking  laws,  but  the  nature 
of  the  problem  which  is  to  be  solved.  If  his  plan  were  adopted, 
the  country  would  undoubtedly  have  a  much  better  bank-note 
than  it  has  at  present,  and  it  is  quite  probable  that  minor  defects 
would  be  perceived  and  corrected  before  any  mischief  had  been 
done.  Mr.  Oilman  is  certainly  right  in  his  belief  that  the  circulat- 
ing notes  provided  by  such  a  system  would  tend  to  render  im- 
possible such  panics  as  the  business  of  the  country  passed 
through  in  1873  and  1893.  As  a  protection  against  panics  due 
to  a  dearth  of  media  of  exchange,  his  system  would  undoubtedly 
prove  effective. 

THE  BANKERS'  MAOAZINE,  NEW  YORK,  says: 
"  Federal  clearing  houses,  acting  under  a  uniform  na- 
tional law,  with  membership  open  to  all  National  and 
State  banks,  are  suggested  in  a  communication  from  Mr. 
Theodore  Oilman,  published  elsewhere  in  this  number, 
together  with  a  bill  designed  to  provide  for  such  organiza- 
tions. Its  underlying  principle  is  to  bind  all  the  banks  to- 
gether into  a  cooperative  system,  and  to  permit  the  issue  of 
notes  by  the  banks  on  the  security  of  assets  deposited  with 
a  central  clearing-house  association,  of  which  there  shall  be 
at  least  one  in  each  State.  The  responsibility  for  the  re- 
demption of  the  notes  is  to  be  assumed  by  all  the  banks  of 
a  particular  State  or  district ;  and  in  case  an  assessment  on 
these  banks  shall  not  provide  sufficient  funds  to  redeem  the 
notes  of  failed  banks,  ah  assessment  is  to  be  levied  on  all  the 
banks  in  the  country  that  are  members  of  the  clearing  house 
association.  There  is  no  doubt  that,  if  all  the  banks 
could  be  brought  together  in  some  way  that  would  not 
be  open  to  the  charge  of  monopoly,  it  would  be  a  happy 
solution  of  one  of  the  most  vexing  questions  in  American 
banking ;  namely,  to  give  to  the  banks  of  the  United 
States  the  stability  of  great  central  banking  institutions 
of  large    capital,    and    at   the  same   time   preserve  the 


autonomy  which  is  such  a  prominent  characteristic  of 
our  banking  system.  Mr.  Gilman's  proposals  seem  well 
calculated  to  lead  to  this  result,  so  far  as  it  can  practi- 
cally be  done. 

"  Circulation  based  on  commercial  assets  could  be  made 
secure  by  a  safety  fund  contributed  by  all  the  banks  of  the 
country,  but  there  would  be  an  element  of  injustice  in  the 
operations  of  such  a  plan.  Under  it  the  banks  of  a  conserva- 
tive State  where  failures  are  almost  unknown  would  be  contin- 
uously taxed  to  provide  for  the  redemption  of  the  notes  of 
failed  banks  in  some  other  State  where  bank  management  is 
comparatively  reckless.  It  is  objectionable  in  this  respect  in 
much  the  same  way  as  a  tax  on  all  the  banks  to  insure  de- 
posits.   As  to  its  expediency,  however,  that  is  another  matter. 

*'  But  under  Mr.  Gilman's  plan,  the  banks  of  a  certain  dis- 
trict or  State  are  given  some  control  over  the  issue  of  notes 
in  their  jurisdiction,  and  the  penalty  for  any  abuse  of  that 
authority  is  made  to  fall  first  upon  them.  This  is,  of  course, 
a  modified  application  of  the  safety-fund  principle,  and  one 
that  seems  entirely  proper.  It  appears  preferable  to  a  gen- 
eral fund  contributed  by  all  the  banks,  and  made  available 
for  the  redemption  of  notes  of  all  failed  banks.  As  nearly 
as  may  be,  it  seeks  to  impose  the  penalty  for  violation  of 
sound  banking  rules  upon  those  most  immediately  con- 
cerned in  the  offense. 

"  The  propriety  of  allowing  all  banks  in  the  United  States 
to  issue  notes  on  the  security  of  their  general  assets,  even 
with  the  additional  safeguard  of  a  fund  contributed  by  all 
the  banks  for  the  redemption  of  the  notes  of  failed  institu- 
tions, is  open  to  serious  question.  To  confine  the  privilege 
to  the  banks  of  large  capital  would  give  just  grounds  for  the 
cry  of  monopoly  which  would  surely  be  raised. 

"  In  the  panic  of  1893,  hundreds  of  really  solvent  and  well- 
managed  banks  were  compelled  to  suspend  temporarily,  and 
it  is  not  improbable  that  most  of  these  failures,  with  their 
attendant  consequences  of  ruin  and  disaster  to  business 
interests,  might  have  been  prevented.  It  is  the  opinion  of 
so  well-informed  a  banker  as  Mr.  Charles  Parsons,  of  St. 
Louis,  that  the  issue  of  one  hundred  millions  of  such 
currency  as  permitted  by  the  measure  under  review, 
would  have  saved  half  or  two  thirds  of  the  ill-effects  of 
that  panic. 

"  The  banks  of  the  United  States  linked  together  are  practi- 
cally invincible,  and  to  effect  such  a  result  without  creating 
a  monopoly  would  not  seem  to  be  impossible,  as  the  principle 
has  long  been  in  successful  operation  on  a  limited  scale  in 
the  large  cities  of  the  country. 

"  When  Congress  shall  take  up  the  currency  question  with 
a  disposition  to'deal  seriously  with  the  subject,  the  proposals 
of  Mr.  Oilman  will  be  found  worthy  of  careful  consideration." 

THE  NEW  YORK  TRIBUNE  says:  "Mr.  Theodore  Oilman 
writes  on  '  an  elastic  currency '  in  a  manner  which  is  most 


5 

refreshing,  after  the  deluge  of  assumptions  that  desired  elas- 
ticity of  currency  can  be  obtained  only  by  unlimited  issues 
of  bank-notes.  It  will  be  observed  that  he  offers  not  one 
word  in  favor  of  intrusting  to  every  bank  the  power  to 
make  currency  on  the  basis  of  anything  it  may  consider 
good  assets.  Plainly,  Mr.  Oilman  knows  that  such  a  plan 
would  be  inadmissible,  and  the  virtue  of  his  proposal  is  that 
it  would  provide  a  powerful  safeguard  respecting  emergency 
issues  of  currency. 

"  It  should  be  said  that  Mr.  Gilman's  plan  has  in  it 
merits  incomparably  beyond  those  of  other  schemes 
which  have  received  great  attention.  It  does  provide 
some  safeguard  against  the  excessive  issues  of  notes  by  any 
one  bank  upon  what  it  may  please  to  consider  good  assets. 
It  puts  the  faith  and  business  experience  and  personal  in- 
terest of  a  number  of  banks  behind  any  issue  permitted,  and 
enlists  them  to  insure  its  retirement.  That  this  proposal 
can  be  so  modified  as  to  be  of  vast  service  to  the  country 
will  not  seem  improbable  to  those  who  have  read  Mr. 
Gilman's  book  on  the  subject,  or  his  statement  last  year 
before  the  Banking  and  Currency  Committee." 

"The  committee  appointed  to  recommend  a  currency 
measure  begins  its  work  this  week,  and  it  embraces  some  of 
the  ablest  and  most  influential  Republican  members  of 
Congress.  It  was  created  by  a  caucus  at  the  last  session,  in 
the  hope  that  it  might  devise  a  measure  which  would  com- 
mand the  support  of  Republicans  in  the  next  House. 

"  Whatever  opinion  members  have  held,  they  will  doubtless 
feel  that  the  trust  confided  to  them  imposes  the  duty  of  can- 
did and  careful  revision  and  comparison  of  opinions,  in  order 
to  meet,  not  their  individual  preferences,  but  the  wishes  of 
the  whole  body  of  Republican  members. 

•'  In  this  light,  the  committee  will  not  fail  to  consider  that 
every  proposal  to  retire  the  greenback  currency  in  order  to 
make  room  for  more  bank  circulation  has  met  and  is  certain 
to  meet  strong  Republican  opposition.  It  may  be  granted 
that  sound  reasons  exist  for  meeting  any  demand  for  larger 
paper  circulation,  or  a  circulation  more  readily  adjusted  to 
the  changing  needs  of  business,  by  some  enlargement  of  the 
bank  issues,  and  provisions  to  that  end  do  not  involve  any 
interference  with  the  existing  legal-tender  circulation.  Of 
all  plans  for  adjustment  of  the  bank  circulation  to  the 
needs  of  business,  the  one  which  seems  to  furnish  a 
better  basis  for  wise  and  safe  action  than  any  other  yet 
offered  is  that  urged  by  Theodore  Gilman,  of  this  city, 
before  the  Banking  and  Currency  Committee,  April  13, 
1898,  and  approved  by  Charles  Parsons,  of  St.  Louis, 
formerly  president  of  the  American  Bankers'  Associa- 
tion." 

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